Puerto Rico’s Public Debts: Accumulation and Restructuring

Changes from May 18, 2021 to May 2, 2022

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Puerto Rico’s Public Debts:
May May ~~18, 2021~~2, 2022
Accumulation and Restructuring
D. Andrew Austin
Puerto Rico’s public debts totaled just over $70 billion when the Puerto Rico Oversight, Puerto Rico’s public debts totaled just over $70 billion when the Puerto Rico Oversight,
Analyst in Economic Policy Analyst in Economic Policy
Management, and Economic Stability Act (P.L. 114-187; Management, and Economic Stability Act (P.L. 114-187; PROMESA) became law on June 30, PROMESA) became law on June 30,

2016. Most of those debts are now in the midst of perhaps the largest restructuring of public debt 2016. Most of those debts are now in the midst of perhaps the largest restructuring of public debt
in U.S. history. By way of comparison, the City of Detroit in U.S. history. By way of comparison, the City of Detroit ~~had~~owed about $18 billion about $18 billion ~~in debt~~ when it when it

entered bankruptcy in 2013. Puerto Rico’s debt restructuring entered bankruptcy in 2013. Puerto Rico’s debt restructuring ~~could also become~~has been one of the most one of the most
expensive ever, with professional fees projected to exceed $1 billion.expensive ever, with professional fees projected to exceed $1 billion. ~~The precarity of Puerto Rico’s fiscal troubles became~~
~~widely known in mid-2013. The restructuring of Puerto Rico’s public debts could inform future federal responses to fiscal~~
~~strains faced by some state and local governments.~~
PROMESA created two paths for debt restructuring and established a Financial Oversight and Management Board (FOMB; PROMESA created two paths for debt restructuring and established a Financial Oversight and Management Board (FOMB;
Oversight Board). Title III established a debt restructuring process that draws on the Bankruptcy Code. Title VI set up a debt Oversight Board). Title III established a debt restructuring process that draws on the Bankruptcy Code. Title VI set up a debt
restructuring process similar to some sovereign debt procedures. U.S. District Court Judge Laura Taylor Swain was chosen to restructuring process similar to some sovereign debt procedures. U.S. District Court Judge Laura Taylor Swain was chosen to
preside over Title III cases. PROMESA conditioned the Oversight Board’s termination on Puerto Rico’s ability to access preside over Title III cases. PROMESA conditioned the Oversight Board’s termination on Puerto Rico’s ability to access
“short-term and long-term credit markets at reasonable interest rates.” “short-term and long-term credit markets at reasonable interest rates.” ~~Restructuring of the island’s debts is a likely~~
~~prerequisite to that access.~~ The Oversight Board, after delays due to Hurricanes Irma and María in September 2017, led The Oversight Board, after delays due to Hurricanes Irma and María in September 2017, led
efforts to restructure the island’s public debts through litigation and negotiations with the Puerto Rican government, hedge efforts to restructure the island’s public debts through litigation and negotiations with the Puerto Rican government, hedge
funds, bond insurers, and others. funds, bond insurers, and others.
Puerto Rico’s public debts fall into four categories: general obligation (GO) bonds and other debt payable through the main Puerto Rico’s public debts fall into four categories: general obligation (GO) bonds and other debt payable through the main
Treasury accounts of the Commonwealth of Puerto Rico (CPRTreasury accounts of the Commonwealth of Puerto Rico (CPR, the island’s central government); sales~~); sales~~ -tax-backed debt known by its Spanish acronym -tax-backed debt known by its Spanish acronym
COFINA and other revenueCOFINA and other revenue~~-backed debt~~ bonds; debt of public corporations such as the Puerto Rico Electric Power Authority ; debt of public corporations such as the Puerto Rico Electric Power Authority
(PREPA); and debt issued by local (PREPA); and debt issued by local ~~county-like~~ governments (governments (municipios) and other smaller entities. In February 2019, ) and other smaller entities. In February 2019, a
~~federal district court judge~~ the Title III court confirmed the confirmed the ~~plan to restructure COFINA debt~~COFINA debt restructuring. Bonds with a par value of $17.6 billion were then . Bonds with a par value of $17.6 billion were then
exchanged for $12 billion in new bonds.exchanged for $12 billion in new bonds. After several postponements in proceedings to restructure debts of the island’s After several postponements in proceedings to restructure debts of the island’s
central government, in early February 2021 the Oversight Board announced an agreement with “certain bondholders” to central government, in early February 2021 the Oversight Board announced an agreement with “certain bondholders” to
restructure GO and related debts. The Board filed the corresponding amended plan with the Title III court on March 8, 2021. restructure GO and related debts. The Board filed the corresponding amended plan with the Title III court on March 8, 2021.
~~On May 4, 2021, the Title III court scheduled a hearing for July 13, 2021, on the adequacy of disclosures describing the plan~~As 2021 progressed, several key creditor groups agreed to support the plan. Compromises with the Commonwealth government and legislature led to enactment of legislation to enable issuance of new debt securities and changes in how public pensions would be treated. On August 2, 2021, the Title III court approved a disclosure statement and scheduled hearings on confirmation of the plan. On January 18, 2022, the court confirmed a plan of adjustment to restructure debts of the Commonwealth of Puerto Rico and certain closely linked public authorities, as well as pension plans for teachers, public employees, and judges. That confirmation resolves various legal disputes. On March 15, 2022, the plan was consummated. Recovery ratios vary by debt class, although for older GO bonds recovery rates were estimated to reach as high as 95%. Attention now shifts to addressing debts of PREPA, the island’s troubled electric power utility. .
This report outlines the accumulation of the island’s public debts and how they are being restructured. Puerto Rico has faced This report outlines the accumulation of the island’s public debts and how they are being restructured. Puerto Rico has faced
a series of fiscal challenges since its postwar economic development strategy of industrialization faltered in the early 1970s, a series of fiscal challenges since its postwar economic development strategy of industrialization faltered in the early 1970s,
including acute budget crises in 2006-2007 and 2013-2016. The island’s lack of access to a means to restructure its debts led including acute budget crises in 2006-2007 and 2013-2016. The island’s lack of access to a means to restructure its debts led
to PROMESA’s enactment. This report focuses on the largest parts of the island’s public debt. For brevity’s sake, it discusses to PROMESA’s enactment. This report focuses on the largest parts of the island’s public debt. For brevity’s sake, it discusses
restructuring of debts issued by PREPA, the Highways and Transportation Authority (HTA), and smaller public corporations restructuring of debts issued by PREPA, the Highways and Transportation Authority (HTA), and smaller public corporations
only in passing. The Puerto Rico Aqueduct and Sewer Authority’s (PRASA’s) relatively stronger finances have kept it from only in passing. The Puerto Rico Aqueduct and Sewer Authority’s (PRASA’s) relatively stronger finances have kept it from
having to restructure its bonds. On May 11, 2021, the Oversight Board affirmed its support for a restructuring plan for having to restructure its bonds. On May 11, 2021, the Oversight Board affirmed its support for a restructuring plan for
PREPA, which had been delayed because of the COVID-19 pandemic, among other disruptions. PREPA, which had been delayed because of the COVID-19 pandemic, among other disruptions.
Hedge funds, which generally tolerate more financial risk than many traditional investors, have played prominent roles in Hedge funds, which generally tolerate more financial risk than many traditional investors, have played prominent roles in
Puerto Rico’s debt restructuring. As default risks on Puerto Rican public debt became evident, many mutual funds reduced Puerto Rico’s debt restructuring. As default risks on Puerto Rican public debt became evident, many mutual funds reduced
their holdings, allowing some hedge funds to increase theirs. In spring 2020, some accused hedge funds of trading on private their holdings, allowing some hedge funds to increase theirs. In spring 2020, some accused hedge funds of trading on private
information obtained through confidential Title III negotiations. In June 2020, Judge Swain required parties to disclose more information obtained through confidential Title III negotiations. In June 2020, Judge Swain required parties to disclose more
about their holdings. about their holdings. ~~Once those disclosures were made, some~~Some called for investigations of alleged trading on nonpublic called for investigations of alleged trading on nonpublic
information obtained in debt negotiations. Legislation was introduced during the 116th Congress (e.g., H.R. 6975, H.R. 683, information obtained in debt negotiations. Legislation was introduced during the 116th Congress (e.g., H.R. 6975, H.R. 683,
S. 1675) to amend PROMESA in ways that could affect debt restructuring processes. S. 1675) to amend PROMESA in ways that could affect debt restructuring processes. ~~On February 24, 2021, the House~~
~~passed H.R. 1192, which would mandate certain disclosures by~~A measure (P.L. 117-82) mandating professionals working on the island’s debt restructuring professionals working on the island’s debt restructuring~~. A~~
~~companion bill (S. 375) was introduced in the Senate. This report’s Appendices include a more detailed listing of Puerto~~
~~Rico’s pre-PROMESA public debts, an analysis of~~ to make certain disclosures was signed into law in January 2022. Appendices to this report list Congressional Research Service Puerto Rico’s Public Debts: Accumulation and Restructuring Puerto Rico’s pre-PROMESA public debts, analyze the evolution of bond prices and trading volumes during the restructuring the evolution of bond prices and trading volumes during the restructuring
process,process, set out a chronology of selected events, and a chronology of selected events, and provide a glossary of abbreviations in English and Spanish. a glossary of abbreviations in English and Spanish.
Congressional Research Service Congressional Research Service

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Introduction
Puerto Rico’s public debts, which totaled just over $70 Puerto Rico’s public debts, which totaled just over $70 ~~bil ion~~ billion when the Puerto Rico Oversight, when the Puerto Rico Oversight,
Management, and Economic Stability Act (P.L. 114-187; PROMESA) became law on June 30, Management, and Economic Stability Act (P.L. 114-187; PROMESA) became law on June 30,
2016, are now in the midst of one of the largest restructurings of public debt in U.S. history. 2016, are now in the midst of one of the largest restructurings of public debt in U.S. history.
Puerto Rico’s fiscal troubles Puerto Rico’s fiscal troubles ~~fel~~ fell under national scrutiny during summer 2013, after the City of under national scrutiny during summer 2013, after the City of
Detroit’s bankruptcy filing reminded investors that municipal bonds are not risk free, and after Detroit’s bankruptcy filing reminded investors that municipal bonds are not risk free, and after
the financial press noted the precarious state of Puerto Rico’s public finances.1 the financial press noted the precarious state of Puerto Rico’s public finances.1 ~~Beyond the~~
~~consequences for the island, likely to last decades, the restructuring of Puerto Rico’s public debts~~
~~could inform future federal responses to fiscal strains faced by some state and local~~
~~governments.2~~
The City of Detroit, by way of comparison, had about $18 billion in debt when it entered bankruptcy in 2013.2 Puerto Rico’s public debts, which in 2016 totaled over $70 billion before including unfunded pension liabilities, were about four times larger than that sum. Puerto Rico could also become one of the most expensive restructurings ever, with professional fees that might exceed $1.4 billion.3 PROMESA, among other provisions, created two paths for debt restructuring: one that draws on PROMESA, among other provisions, created two paths for debt restructuring: one that draws on
the Bankruptcy Code and another that is similar to some sovereign debt procedures. It also the Bankruptcy Code and another that is similar to some sovereign debt procedures. It also
established a Financial Oversight and Management Board (FOMB; Oversight Board) and established a Financial Oversight and Management Board (FOMB; Oversight Board) and
empowered it to represent the Puerto Rican government in those debt restructuring processes. empowered it to represent the Puerto Rican government in those debt restructuring processes.
Those processes have included extensive litigation and negotiations with the Puerto Rican Those processes have included extensive litigation and negotiations with the Puerto Rican
government, hedge funds, bond insurers, and other creditors. government, hedge funds, bond insurers, and other creditors. ~~Destruction caused by Hurricanes~~
~~Irma and María in September 2017, gubernatorial turnover, and the complexity of litigation have~~
~~delayed debt restructuring.~~
~~PROMESA conditions the Oversight Board’s termination on Puerto Rico’s ability to access~~
~~“short-term and long-term credit markets at reasonable interest rates.”3 Completing the process of~~
~~restructuring the island’s debts into a fiscal y sustainable form is a likely prerequisite to that~~
~~access.~~
~~The City of Detroit, by way of comparison, had about $18 bil ion in debt when it entered~~
~~bankruptcy in 2013.4 Puerto Rico’s public debts, which totaled over $70 bil ion before including~~
~~unfunded pension liabilities, are about four times larger than that sum. Puerto Rico could also~~
~~become one of the most expensive restructurings ever, with professional fees that might exceed~~
~~$1.4 bil ion.5~~
The restructuring of Puerto Rico’s public debts, some contend, could inform future federal responses to fiscal strains faced by some state and local governments.4 Disputes over the relative priority of general obligation (GO) debt claims and claims of sales-and- Disputes over the relative priority of general obligation (GO) debt claims and claims of sales-and-
use-tax-backed debt were a central point of contention in the debt restructuring process. The use-tax-backed debt were a central point of contention in the debt restructuring process. The
Oversight Board decided to first restructure the salesOversight Board decided to first restructure the sales -tax-backed bonds—known as COFINA tax-backed bonds—known as COFINA
bonds after their Spanish acronym.bonds after their Spanish acronym.~~6 In August 2018, the~~ 5 After delays due to gubernatorial turnover in January 2017 and the destruction caused by Hurricanes Irma and María in September 2017, in August 2018 the Oversight Board reached an agreement with Board reached an agreement with
COFINA bondholders on a split of sales tax revenues COFINA bondholders on a split of sales tax revenues between COFINA debt service and Puerto Rico’s central government, the Commonwealth of Puerto Rico (CPR). On February 4, 2019, a federal district court judge confirmed a plan based on that agreement, clearing the way to a restructuring of Puerto Rico’s COFINA debt. At that time, 1 Andrew Bary, “Troubling Winds: Puerto Rico’s Huge Debt Could Overwhelm Attempts to Revive its Economy,” Barron’s, August 26, 2013. 2~~between COFINA debt service and Puerto~~

~~1 Andrew Bary, “T roubling Winds: Puerto Rico’s Huge Debt Could Overwhelm Attempts to Revive its Economy,”~~
Barron’s, August 26, 2013.
~~2 For instance, one bankruptcy lawyer stated that Puerto Rico’s debt restructuring process would “ almost certainly~~
~~shape future municipal restructurings.” David R. Doyle, “ T he Puerto Rico ‘Bankruptcy’: a Cheat Sheet,” American~~
~~Bankruptcy Institute, https://www.abi.org/feed-item/the-puerto-rico-%E2%80%9Cbankruptcy%E2%80%9D-a-cheat-~~
~~sheet .~~
~~3 PROMESA §209 also requires implementation of modified accrual accounting standards and balanced budgets.~~
4 Roni A. Elias, “A Lesson From Detroit: Ways to Make Municipal Bankruptcy More Rare and Less Painful,” Roni A. Elias, “A Lesson From Detroit: Ways to Make Municipal Bankruptcy More Rare and Less Painful,” Federal
Lawyer, May 2017, p. 70, https://www.fedbar.org/wp-content/uploads/2017/05/bankruptcy_elias-pdf-1.pdf. , May 2017, p. 70, https://www.fedbar.org/wp-content/uploads/2017/05/bankruptcy_elias-pdf-1.pdf.
53 Christian Ramos Segarra Christian Ramos Segarra and Rosario Fajardol, “$832 Million in Attorney Fees for Puerto Rico Bankruptcy Process,” and Rosario Fajardol, “$832 Million in Attorney Fees for Puerto Rico Bankruptcy Process,”
Weekly Journal/El Vocero, January 27, 2021, https://www.theweeklyjournal.com/business/832-million-in-attorney-, January 27, 2021, https://www.theweeklyjournal.com/business/832-million-in-attorney-
fees-for-puerto-rico-bankruptcy-process/article_e6b6a3f4-6027-11eb-af4c-e796e78d7a4c.html. fees-for-puerto-rico-bankruptcy-process/article_e6b6a3f4-6027-11eb-af4c-e796e78d7a4c.html.
~~6 COFINA~~ 4 For instance, one bankruptcy lawyer stated that Puerto Rico’s debt restructuring process would “almost certainly shape future municipal restructurings.” David R. Doyle, “The Puerto Rico ‘Bankruptcy’: a Cheat Sheet,” American Bankruptcy Institute, https://www.abi.org/feed-item/the-puerto-rico-%E2%80%9Cbankruptcy%E2%80%9D-a-cheat-sheet. 5 COFINA is the Corporación del Fondo de Interés Apremiante de Puerto Ricois the Corporación del Fondo de Interés Apremiante de Puerto Rico. Appendix D lists commonly used lists commonly used
abbreviations and acronyms. abbreviations and acronyms.
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1 1

Puerto Rico’s Public Debts: Accumulation and Restructuring

~~Rico’s central government, the Commonwealth of Puerto Rico (CPR). That agreement became a~~
~~plan that a federal district court judge confirmed on February 4, 2019, clearing the way to a~~
~~restructuring of Puerto Rico’s COFINA debt, which, at that time,~~COFINA bonds represented nearly one-quarter represented nearly one-quarter
of the island’s outstanding public debt.of the island’s outstanding public debt.76 Bonds with a par value of $17.6 Bonds with a par value of $17.6 ~~bil ion~~billion were then were then
exchanged for $12 exchanged for $12 ~~bil ion~~billion in new bonds. in new bonds.8
7 On February 23, 2021, On February 23, 2021, the Oversight Board the Oversight Board ~~announced a revised plan agreed to by “certain bondholders” to~~
~~restructure~~pivoted toward restructuring the island’s GO bonds and certain other central government debts the island’s GO bonds and certain other central government debts~~.9 The plan, if implemented,~~
~~would reduce the CPR’s debt service obligations substantially, albeit by less than a plan put forth in~~
~~October 2020.~~ by announcing an agreement with “certain bondholders” on a revised restructuring plan.8 The Board filed a disclosure statement describing the amended plan The Board filed a disclosure statement describing the amended plan of adjustment with the Title III court with the Title III court
~~on March 8, 2021.10 On May 4, 2021, the Title III court scheduled a hearing for July 13, 2021, on the~~
~~adequacy of disclosures describing the plan.11 Confirmation by the Title III court would be required to~~
~~implement that plan, as well as other plans currently being negotiated.~~
~~This report outlines the accumulation of Puerto Rico’s debt and the restructuring of the island’s~~
~~public debt through processes established by PROMESA. Puerto Rico’s postwar economic~~
~~development strategy of industrialization, as noted below, faltered after the 1973 energy crisis.~~
~~Acute fiscal crises in 2006-2007 and 2013-2016 resulted in debt levels that could neither be~~
~~sustained nor addressed through the Bankruptcy Code, which led to PROMESA’s enactment.~~
~~This report focuses on the largest portions of the island’s public debt. For brevity’s sake, it omits~~
~~discussion of pensions and the restructuring of public corporations, such as the Puerto Rico~~
~~Electric Power Authority (PREPA)12, the Highways and Transportation Authority (HTA), and~~
~~smal er entities. Also, the Puerto Rico Aqueduct and Sewer Authority’s (PRASA’s) somewhat~~
~~stronger financial position has enabled it to avoid the need to seek a restructuring of its bonds.13~~
~~The report’s Appendices include a summary of the structure of Puerto Rico’s pre-restructuring~~
~~public debts, an analysis of the evolution of prices and trading volumes of selected bonds during~~
~~the restructuring process, a chronology of selected events, and a glossary of abbreviations in~~
~~English and Spanish.~~

~~7 Laura T aylor Swain, U.S. District Judge, “Memorandum of Opinion and Order Approving Settlement Between~~
~~Commonwealth of Puerto Rico and Puerto Rico Sales T ax Financing Corporation,” February 4, 2019, at~~
~~https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT AzMDUx&id2=0.~~
~~8 Robert Slavin, “COFINA Swaps Out Bonds in Biggest U.S. Muni Restructuring,” Bond Buyer, February 12, 2019.~~
~~9 Oversight Board, “Oversight Board Reaches Agreement in Principle on Debt: Creditors Holding About $7 Billion of~~
~~General Obligation and Public Building Authority Bonds Committed; Mediation Continues to Gain~~ on March 8, 2021.9 After a series of hearings on the adequacy of plan disclosures in July 2021,10 on August 2, 2021, the Title III court approved a disclosure statement and scheduled hearings on confirmation of the plan.11 As 2021 progressed, several key creditor groups came to support the plan once modifications had been agreed to in negotiations. Compromises with the Commonwealth government and legislature led to enactment of legislation to enable issuance of new debt securities and some changes in public pensions.12 On January 18, 2022, the Title III court confirmed the plan of adjustment to restructure debts of the Commonwealth of Puerto Rico and certain closely linked public authorities, as well as modified pension plans for teachers, public employees, and judges.13 The confirmation resolves various legal disputes, albeit subject to appeals. That plan of adjustment was consummated on March 15, 2022.14 A later section of this report discusses events that led to the confirmation order in more detail. PROMESA conditions the Oversight Board’s termination on Puerto Rico’s ability to access “short-term and long-term credit markets at reasonable interest rates.”15 Finishing the restructuring of the island’s debts into a fiscally sustainable form is a likely prerequisite to that access. 6 Laura Taylor Swain, U.S. District Judge, “Memorandum of Opinion and Order Approving Settlement Between Commonwealth of Puerto Rico and Puerto Rico Sales Tax Financing Corporation,” February 4, 2019, at https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTAzMDUx&id2=0. 7 Robert Slavin, “COFINA Swaps Out Bonds in Biggest U.S. Muni Restructuring,” Bond Buyer, February 12, 2019. 8 Oversight Board, “Oversight Board Reaches Agreement in Principle on Debt: Creditors Holding About $7 Billion of General Obligation and Public Building Authority Bonds Committed; Mediation Continues to Gain Support Across Support Across
Broad Spectrum of Creditors,” press release, February 10, 2021, https://drive.google.com/file/d/Broad Spectrum of Creditors,” press release, February 10, 2021, https://drive.google.com/file/d/
149MrGro7s_q6W5tc8QoxLpwRo8NArnYR/view. Also see Oversight Board, “149MrGro7s_q6W5tc8QoxLpwRo8NArnYR/view. Also see Oversight Board, “ New Debt Agreement Opens Path to New Debt Agreement Opens Path to
Exit From Bankruptcy,” press release, February 23, 2021, https://drive.google.com/file/d/Exit From Bankruptcy,” press release, February 23, 2021, https://drive.google.com/file/d/
~~1go1HKPzYdtGFVFSfEotCgGDW7T Hhtn0j/view.~~
101go1HKPzYdtGFVFSfEotCgGDW7THhtn0j/view. 9 In re: CPR, Oversight Board, In re: CPR, Oversight Board, Second Amended Title III Joint Plan Of Adjustment of the Commonwealth of Puerto
Rico, et al., March 8, 2021, https://drive., March 8, 2021, https://drive.~~google~~goole.com/file/d/1IP-znS391lEFMcg35u6flHfcndndyxec/view. .com/file/d/1IP-znS391lEFMcg35u6flHfcndndyxec/view.
1110 Laura Laura ~~T aylor~~Taylor Swain, U.S. Swain, U.S. District Judge,District Judge, “Order Scheduling“Order Scheduling a Hearing on the Adequacya Hearing on the Adequacy of Information Contained in of Information Contained in
the Disclosure Statement,” May 4, 2021, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=the Disclosure Statement,” May 4, 2021, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=
~~MT AxMjI3OA==&id2=0.~~
~~12 On May 11, 2021, the Oversight Board affirmed its support for a restruct uring plan for PREPA, which had been~~
~~delayed because of the COVID-19 pandemic, among other disruptions. Oversight Board, Status Report, May 11, 2021,~~
~~https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=MT AxMzMxNg==&id2=0.~~
~~13 T he federal government agreed to reduce debt service on Clean Water State Revolving Fund Programs, the Drinking~~
~~Water State Revolving Fund Programs, and the U.S. Department of Agriculture’s Rural Development (RD) Program.~~
~~See PRASA, 2020 Fiscal Plan, June 29, 2020, pp. 3-60, 3-61, https://www.aafaf.pr.gov/wp-content/uploads/2020-~~
~~Fiscal-Plan-for-PRASA-as-Certified-by-FOMB-on-June-29-2020.pdf.~~
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~~The Long Build-Up to Puerto Rico’s Debt Crisis~~
~~Over the past few decades, Puerto Rico’s government has struggled to collect sufficient revenues~~
~~to cover outlays, which led to rising public debt levels and growing unfunded pension liabilities.14~~MTAxMjI3OA==&id2=0. https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=MTAyNDA4Mg==&id2=0. 11 Laura Taylor Swain, U.S. District Judge, “Order Approving Disclosure Statement,” August 2, 2021, https://cases.primeclerk.com//puertorico/Home-DownloadPDF?id1=MTAyOTMyOQ==&id2=0. 12 Maria Chutchian, “Puerto Rico Bankruptcy Nears End as Debt Plan Goes Up for Approval,” Reuters, November 9, 2021, https://www.reuters.com/legal/transactional/puerto-rico-bankruptcy-nears-end-debt-plan-goes-up-approval-2021-11-08/. 13 Laura Taylor Swain, U.S. District Judge, “Order Confirming Plan of Adjustment,” January 18, 2022, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=MTA4MTY5MQ==&id2=-1. 14 Order Confirming Modified Eighth Amended Title III Plan of Adjustment of the CPR, et al., March 15, 2022, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=MTA4Njg3NQ==&id2=-1. 15 PROMESA §209 also requires implementation of modified accrual accounting standards and balanced budgets. Congressional Research Service 2 Puerto Rico’s Public Debts: Accumulation and Restructuring This report outlines the accumulation of Puerto Rico’s debt and the restructuring of the island’s public debt through processes established by PROMESA. Acute fiscal crises in 2006-2007 and 2013-2016 resulted in debt levels that could neither be sustained nor addressed through the Bankruptcy Code, which led to PROMESA’s enactment. This report focuses on the largest portions of the island’s public debt. For brevity’s sake, it omits discussion of pensions and the restructuring of public corporations, such as the Puerto Rico Electric Power Authority (PREPA)16, the Highways and Transportation Authority (HTA), and smaller entities. Also, the Puerto Rico Aqueduct and Sewer Authority’s (PRASA’s) somewhat stronger financial position has enabled it to avoid the need to seek a restructuring of its bonds.17 The report’s Appendices include a summary of the structure of Puerto Rico’s pre-restructuring public debts, an analysis of the evolution of prices and trading volumes of selected bonds during the restructuring process, a chronology of selected events, and a glossary of abbreviations in English and Spanish. The Long Build-Up to Puerto Rico’s Debt Crisis Over the past few decades, Puerto Rico’s government has struggled to collect sufficient revenues to cover outlays, which led to rising public debt levels and growing unfunded pension liabilities.18
Postwar Development Strategy Made Puerto Rico a Model
From the onset of World War II in 1939 until the 1973 energy crisis, Puerto Rico had been put From the onset of World War II in 1939 until the 1973 energy crisis, Puerto Rico had been put
forth as a model for economic development through industrialization supported by generous tax forth as a model for economic development through industrialization supported by generous tax
incentives.incentives.1519 That energy crisis, along with broader changes in the global economy including That energy crisis, along with broader changes in the global economy including
heightened trade competition from middle-income countries, brought Puerto Rico’s postwar era heightened trade competition from middle-income countries, brought Puerto Rico’s postwar era
of rapid economic progress to an end.of rapid economic progress to an end.16
20 During the 20th century, Puerto Rico closed much of the gap with the mainland in per capita During the 20th century, Puerto Rico closed much of the gap with the mainland in per capita
income, literacy, and health status.income, literacy, and health status.1721 Nonetheless, by the 1970s Puerto Rico was Nonetheless, by the 1970s Puerto Rico was ~~stil~~ still far poorer, in far poorer, in
terms of median household income, than the poorest mainland state. Since then, that income gap terms of median household income, than the poorest mainland state. Since then, that income gap
has narrowed more slowly.has narrowed more slowly.1822 Despite the economic slowdown in the 1970s, public debt levels Despite the economic slowdown in the 1970s, public debt levels
~~remained nearly steady before increasing in the mid-1980s, as shown in Figure 1. By 2014, the~~
~~island’s public debt reached a level roughly equivalent to its gross national product (GNP).19~~
~~Public corporations, which provide electricity, water, transportation, and other publicly provided~~
~~services, accounted for much of that accumulation of debt. Puerto Rico’s central government,~~
~~whose budgets were considered separate from its public corporations, kept revenues and outlays~~
~~roughly in balance until 2000, when outlays began to consistently outpace revenues.20~~
~~The 2006 Budgetary Crisis~~
~~In 2006, the Puerto Rican legislature and then-Governor Aníbal Acevedo Vilá reached an impasse~~
~~on a budget and how to address looming fiscal chal enges. By late 2006, after credit rating~~
~~agencies downgraded the island’s GO bonds nearly to junk status, island officials and their~~

~~14 For more information, see CRS Report R44095, Puerto Rico’s Current Fiscal Challenges, by D. Andrew Austin.~~
~~15 T errence Farrell, “Arthur Lewis and the Case for Caribbean~~ 16 On May 11, 2021, the Oversight Board affirmed its support for a restructuring plan for PREPA, which had been delayed because of the COVID-19 pandemic, among other disruptions. Oversight Board, Status Report, May 11, 2021, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=MTAxMzMxNg==&id2=0. 17 The federal government agreed to reduce debt service on Clean Water State Revolving Fund Programs, the Drinking Water State Revolving Fund Programs, and the U.S. Department of Agriculture’s Rural Development (RD) Program. See PRASA, 2020 Fiscal Plan, June 29, 2020, pp. 3-60, 3-61, https://www.aafaf.pr.gov/wp-content/uploads/2020-Fiscal-Plan-for-PRASA-as-Certified-by-FOMB-on-June-29-2020.pdf. 18 For more information, see CRS Report R44095, Puerto Rico’s Current Fiscal Challenges, by D. Andrew Austin. 19 Terrence Farrell, “Arthur Lewis and the Case for Caribbean Industrialisation,” Industrialisation,” Social and Economic Studies, vol. 29, vol. 29,
no. 4 (December 1980), pp. 52-75, http://www.jstor.org/stable/27861908. According to one recent analysis, “no. 4 (December 1980), pp. 52-75, http://www.jstor.org/stable/27861908. According to one recent analysis, “ real [gross real [gross
domestic product] GDPdomestic product] GDP per capita increased at a rate of 5.3 percent between 1950 and 1974.” John Devereux, per capita increased at a rate of 5.3 percent between 1950 and 1974.” John Devereux,
“Arrested Development? Puerto Rico in an American Century,” “Arrested Development? Puerto Rico in an American Century,” Journal of Economic History, vol. 79, no. 3 , vol. 79, no. 3
(September 2019), pp. 708-735. (September 2019), pp. 708-735.
~~16 See CRS~~ 20 See CRS Report R44095, Report R44095, Puerto Rico’s Current Fiscal Challenges, by D. Andrew, by D. Andrew Austin. Congressional clients may Austin. Congressional clients may
request a longer memorandum version. request a longer memorandum version.
1721 Brian Marein, “Economic Development in Puerto Rico after US Annexation: Anthropometric Evidence,” Brian Marein, “Economic Development in Puerto Rico after US Annexation: Anthropometric Evidence,” Economics
& ~~Hum an~~Human Biology, vol. 38, August 2020. , vol. 38, August 2020.
~~18 T he~~22 The 1990 Census found Puerto Rico’s median household income was 1990 Census found Puerto Rico’s median household income was 44% of Mississippi’s44% of Mississippi’s and 30% of the U.S. and 30% of the U.S.
~~estimate. T he 2014-2018 American Community Survey found Puerto Rico’s median household income was 46% of~~
~~Mississippi’s and 33% of the U.S. estimate.~~
19 Congressional Research Service 3 link to page 9 Puerto Rico’s Public Debts: Accumulation and Restructuring remained nearly steady before increasing in the mid-1980s, as shown in Figure 1. By 2014, the island’s public debt reached a level roughly equivalent to its gross national product (GNP).23 Figure 1. Puerto Rico’s Public Debt, 1960-2017 In billions of constant (FY2017) dollars Source: Statistical Appendix (Apéndice Estadístico), various years; available at https://web.archive.org/web/20160831062749/http://www.jp.gobierno.pr/Portal_JP/Default.aspx?tabid=184. Notes: Data represent gross public debt of Puerto Rico as of June 30 of each year, provided by the Government Development Bank of Puerto Rico. Figures for 1989 and 2014 were preliminary estimates. HTA and the University of Puerto Rico are included in the Commonwealth Government subtotal. The U.S. GDP price index is used to adjust levels for inflation. Recent Apéndices Estadístico omit debt data. estimate. The 2014-2018 American Community Survey found Puerto Rico’s median household income was 46% of Mississippi’s and 33% of the U.S. estimate. 23 Government Development Bank (GDB), Government Development Bank (GDB), Commonwealth Quarterly Financial Report, July 17, 2014, pp. 41-42, , July 17, 2014, pp. 41-42,
http://www.gdb-pur.com/documents/CommonwealthQuarterlyReport71714.pdf; and Commonwealth of Puerto Rico, http://www.gdb-pur.com/documents/CommonwealthQuarterlyReport71714.pdf; and Commonwealth of Puerto Rico,
Consolidated Annual Financial Report for FY2013 , note 22, pp. 230-231, http://www.hacienda.gobierno.pr/downloads/, note 22, pp. 230-231, http://www.hacienda.gobierno.pr/downloads/
pdf/cafr/pdf/cafr/~~FINANCIAL_REPORT _2013~~FINANCIAL_REPORT_2013.pdf. GNP, which measures.pdf. GNP, which measures the island’s total income, is typically usedthe island’s total income, is typically used to to
measure the Puerto Rican economy becausemeasure the Puerto Rican economy because gross domestic product (GDP) is distorted by the tax avoidance strategies gross domestic product (GDP) is distorted by the tax avoidance strategies
of multinational corporations with Puerto Rican subsidiaries. of multinational corporations with Puerto Rican subsidiaries.
~~20 Carlos A. Colon de Armas, “ La Constitución de Puerto Rico y su Requisit o de un Presupuesto Balanceado,”~~ ~~Revista~~
~~Jurídica Universidad de Puerto Rico, vol. 85, no. 3 (2016), pp. 819-832, esp. T able 2.~~
~~Congressional Research Service~~

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~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

Congressional Research Service 4 Puerto Rico’s Public Debts: Accumulation and Restructuring Public corporations, which provide electricity, water, transportation, and other publicly provided services, accounted for much of that accumulation of debt. Puerto Rico’s central government, whose budgets were considered separate from its public corporations, kept revenues and outlays roughly in balance until 2000, when outlays began to consistently outpace revenues.24 The 2006 Budgetary Crisis In 2006, the Puerto Rican legislature and then-Governor Aníbal Acevedo Vilá reached an impasse on a budget and how to address looming fiscal challenges. By late 2006, after credit rating agencies downgraded the island’s GO bonds nearly to junk status, island officials and their financial advisors soon came to view bonds backed by sales tax revenues as one way to manage financial advisors soon came to view bonds backed by sales tax revenues as one way to manage
fiscal fiscal ~~chal enges~~challenges. .
Tax-Backed COFINA Bonds Provided Stop-Gap Financing
Seeking to pay off old debts incurred without a clear means of repayment, the island’s legislature Seeking to pay off old debts incurred without a clear means of repayment, the island’s legislature
and governor enacted measures in the second half of 2006 that set up a securitization of a new and governor enacted measures in the second half of 2006 that set up a securitization of a new
5.5% sales and use tax, which replaced an excise tax.5.5% sales and use tax, which replaced an excise tax.2125 The tax-backed bonds were able to obtain The tax-backed bonds were able to obtain
a high credit rating, and thus could be issued with a lower yield, reducing debt service costs to the a high credit rating, and thus could be issued with a lower yield, reducing debt service costs to the
~~Puerto Rican government.~~
~~Figure 1. Puerto Rico’s Public Debt, 1960-2017~~
~~In bil ions of constant (FY2017) dol ars~~

Source: Statistical Appendix (Apéndice Estadístico), various years; available at https://web.archive.org/web/
~~20160831062749/http://www.jp.gobierno.pr/Portal_JP/Default.aspx?tabid=184.~~
Notes: Data represent gross public debt of Puerto Rico as of June 30 of each year, provided by the Government
~~Development Bank of Puerto Rico. Figures for 1989 and 2014 were preliminary estimates. HTA and the~~
~~University of Puerto Rico are included in the Commonwealth Government subtotal. The U.S. GDP price index is~~
~~used to adjust levels for inflation. Recent Apéndices Estadístico omit debt data.~~

~~Congressional Research Service~~

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~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

Puerto Rican government. COFINA was established as a public corporation controlled by the Government Development COFINA was established as a public corporation controlled by the Government Development
Bank (GDB) to issue bonds backed by half of the proceeds of the new tax, which were divided Bank (GDB) to issue bonds backed by half of the proceeds of the new tax, which were divided
between senior bonds carrying stronger investor protections and junior (subordinate) bonds.between senior bonds carrying stronger investor protections and junior (subordinate) bonds.22
COFINA provided funds to the Puerto Rican government and helped service its debts, but its COFINA provided funds to the Puerto Rican government and helped service its debts, but its
proceeds were not tied to infrastructure projects. Instead, funds covered past debts and continuing proceeds were not tied to infrastructure projects. Instead, funds covered past debts and continuing
operating budget deficits—a process termed “scoop and toss.”operating budget deficits—a process termed “scoop and toss.”2326 The legal status of COFINA and The legal status of COFINA and
its relation to fiscal provisions in the Puerto Rican Constitution later became a central point of its relation to fiscal provisions in the Puerto Rican Constitution later became a central point of
contention in debt restructuring litigation and negotiations, as subsequent sections contention in debt restructuring litigation and negotiations, as subsequent sections ~~wil~~ will discuss. discuss.
As the Great Recession of 2007-2009 strained Puerto Rico’s economy and public finances, more As the Great Recession of 2007-2009 strained Puerto Rico’s economy and public finances, more
COFINA bonds were issued. Those bonds were viewed as a more favorable financing option COFINA bonds were issued. Those bonds were viewed as a more favorable financing option
because they carried better credit ratings than CPR GO debt and thus could be issued with a lower because they carried better credit ratings than CPR GO debt and thus could be issued with a lower
yield. The last COFINA bonds were issued in 2011.yield. The last COFINA bonds were issued in 2011.2427 From 2009 through 2011, former Oversight From 2009 through 2011, former Oversight
Board member Carlos García held senior posts in GDB, including serving as its president. From Board member Carlos García held senior posts in GDB, including serving as its president. From
2001 through 2006, García worked at Banco Santander, which helped place Puerto Rico’s 2001 through 2006, García worked at Banco Santander, which helped place Puerto Rico’s
pension bonds and which accumulated large holdings of COFINA bonds.pension bonds and which accumulated large holdings of COFINA bonds.2528 24 Carlos A. Colon de Armas, “La Constitución de Puerto Rico y su Requisito de un Presupuesto Balanceado,” Revista Jurídica Universidad de Puerto Rico, vol. 85, no. 3 (2016), pp. 819-832, esp. Table 2. 25 COFINA (Corporación del Fondo de Interés Apremiante), known in English as the Puerto Rico Sales Tax Financing Corporation, was established by Act 91-2006, enacted May 13, 2006, http://www.lexjuris.com/lexlex/leyes2006/lexl2006091.htm; Act 117-2006, enacted July 4, 2006 (established sales and use tax); Act 291-2006, enacted December 26, 2006. Kobre & Kim LLP, Final Investigative Report, August 20, 2018, https://drive.google.com/file/d/19-lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view. Part VI of that report presents an analysis of COFINA debt. GDB’s board acted as COFINA’s board. Act 56-2007 (pp. 3-4) granted COFINA the same legal privileges as GDB. 26 Mike Cherney, “Borrowing Maneuver Catches Flak: ‘Scoop and Toss’ Involves Selling New Debt to Pay Off Existing Bonds,” Wall Street Journal, December 2, 2013. 27 Kobre & Kim LLP, Final Investigative Report, August 20, 2018, pp. 179-188. 28 Santander Asset Management, “First Puerto Rico Tax Exempt Fund (Class A),” March 31, 2016, http://periodismoinvestigativo.com/wp-content/uploads//2016/12/TE-1Q2016.pdf. Congressional Research Service 5 Puerto Rico’s Public Debts: Accumulation and Restructuring
Experiences with Pension Obligation Bonds
The Great Recession and ongoing budgetary pressures also affected Puerto Rico’s three public The Great Recession and ongoing budgetary pressures also affected Puerto Rico’s three public
pension systems, which had been severely underfunded. Unfunded obligations of Puerto Rico’s pension systems, which had been severely underfunded. Unfunded obligations of Puerto Rico’s
public pension systems were estimated at over $40 public pension systems were estimated at over $40 ~~bil ion~~billion in 2016. Many beneficiaries of Puerto in 2016. Many beneficiaries of Puerto
Rico’s public pensions were ineligibleRico’s public pensions were ineligible for the federal Social Security program, leaving them for the federal Social Security program, leaving them
dependent on systems with few remaining assets and uncertain financial prospects.dependent on systems with few remaining assets and uncertain financial prospects.
In 2006, In 2006, ~~Merril~~ Merrill Lynch advisors suggested that the Puerto Rico Employee Retirement System Lynch advisors suggested that the Puerto Rico Employee Retirement System
(ERS) and (ERS) and ~~Merril~~ Merrill Lynch issue at least $7 Lynch issue at least $7 ~~bil ion~~ billion in pension obligation bonds (POBs). in pension obligation bonds (POBs). ~~Merril~~
Merrill Lynch was unable to place those bonds with investors because the bonds were ineligible for a Lynch was unable to place those bonds with investors because the bonds were ineligible for a
federal tax exemption. federal tax exemption.
Other jurisdictions have issued POBs in the hope that returns on investments funded by bond Other jurisdictions have issued POBs in the hope that returns on investments funded by bond
proceeds would cover principal and interest payments plus the forgone investment earnings that proceeds would cover principal and interest payments plus the forgone investment earnings that
could have been made using contributions pledged to back the bonds—an approach known as an could have been made using contributions pledged to back the bonds—an approach known as an
arbitrage strategy.arbitrage strategy.2629 That strategy might conceivably reduce unfunded pension liabilities That strategy might conceivably reduce unfunded pension liabilities were were
investment yields sufficiently high, if fees and other costs were low, and if bond proceeds were investment yields sufficiently high, if fees and other costs were low, and if bond proceeds were
not diverted to cover other liabilities.not diverted to cover other liabilities. Low yields or losses would expand pension liabilities. Low yields or losses would expand pension liabilities.
In 2008, UBS (Union Bank of Switzerland)—which had also advised island officials on the In 2008, UBS (Union Bank of Switzerland)—which had also advised island officials on the
~~structure of the bonds—underwrote three rounds of POBs. UBS’s own proprietary funds—largely~~

~~22 COFINA (Corporación del Fondo de Interés Apremiante), known in English as the Puerto Rico Sales T ax Financing~~
~~Corporation, was established by Act 91-2006, enacted May 13, 2006, http://www.lexjuris.com/lexlex/leyes2006/~~
~~lexl2006091.htm; Act 117-2006, enacted July 4, 2006 (established sales and use tax); Act 291-2006, enacted December~~
~~26, 2006. Kobre & Kim LLP, Final Investigative Report, August 20, 2018, https://drive.google.com/file/d/19-~~
~~lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view. Part VI of that report presents an analysis of COFINA debt. GDB’s~~
~~board acted as COFINA’s board. Act 56-2007 (pp. 3-4) granted COFINA the same legal privileges as GDB.~~
~~23 Mike Cherney, “Borrowing Maneuver Catches Flak: ‘Scoop and T oss’ Involves Selling New Debt to Pay Off~~
~~Existing Bonds,” Wall Street Journal, December 2, 2013.~~
~~24 Kobre & Kim LLP, Final Investigative Report, August 20, 2018, pp. 179-188.~~
~~25 Santander Asset Management, “First Puerto Rico T ax Exempt Fund (Class A),” March 31, 2016,~~
~~http://periodismoinvestigativo.com/wp-content/uploads//2016/12/TE-1Q2016.pdf.~~
~~26 See Kobre & Kim, Final Investigative Report, August 20, 2018, Part VII.~~
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~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

structure of the bonds—underwrote three rounds of POBs. UBS’s own proprietary funds—largely closed-end mutual funds marketed to Puerto Rico residents—bought 41% of the first POB issue, closed-end mutual funds marketed to Puerto Rico residents—bought 41% of the first POB issue,
89% of the second issue, and 38% of the third. Santander and Banco Popular, two of the largest 89% of the second issue, and 38% of the third. Santander and Banco Popular, two of the largest
banks in Puerto Rico, apparently bought nearly banks in Puerto Rico, apparently bought nearly al all of the remaining bonds in the second issue.of the remaining bonds in the second issue.2730
The Puerto Rico POBs incurred substantial losses and raised serious questions regarding the The Puerto Rico POBs incurred substantial losses and raised serious questions regarding the
judgement of ERS board members, the island government’s financial advisors, and investment judgement of ERS board members, the island government’s financial advisors, and investment
banks involved in implementing the bond sales. A 2010 analysis of the ERS POBs’ issuance by banks involved in implementing the bond sales. A 2010 analysis of the ERS POBs’ issuance by
financial analysis firm Conway MacKenzie was sharply critical of responsible officials.financial analysis firm Conway MacKenzie was sharply critical of responsible officials.2831 The The
underlying bonds’ poor performance and the use of leverage resulted in substantial losses for underlying bonds’ poor performance and the use of leverage resulted in substantial losses for
retail investors who held those UBS mutual funds.retail investors who held those UBS mutual funds.2932 A Puerto Rico subsidiary of UBS agreed to A Puerto Rico subsidiary of UBS agreed to
pay $34 pay $34 ~~mil ion~~ million to settle claims regarding marketing of its closed-end bond funds with the U.S. to settle claims regarding marketing of its closed-end bond funds with the U.S.
Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority
(FINRA) in September 2015. One UBS financial advisor pleaded guilty to criminal fraud charges (FINRA) in September 2015. One UBS financial advisor pleaded guilty to criminal fraud charges
~~in November 2018.30~~
~~Bonds and Municipal Finance~~
~~State and local governments borrow to finance schools, streets, sewers, and other public infrastructure projects,~~
~~or to support certain private projects, as wel as to close short-term gaps between public revenues and outlays.~~
~~U.S. state and local borrowing totaled over $3 tril ion in mid-2020.31 Municipal securities, such as bonds and notes,~~
~~are general y exempt from federal taxes. Most states exempt their own securities from tax, though fewer exempt~~
~~those of other states. Bonds issued by Puerto Rico, with some exceptions, offer a triple exemption from taxes—~~
~~that is, exempt from federal, state, and local taxes—that made them attractive to municipal mutual fund managers~~
~~and to high-income households.32~~
~~Municipal securities offered on the U.S. mainland are subject to SEC regulation, though securities issued by~~
~~investment companies based in U.S. territories are not covered by the 1940 Investment Company Act (ICA; P.L.~~
~~76-768).33~~

~~27 Craig McCann and Edward O'Neal, “UBS Succumbed~~ in November 2018.33 29 See Kobre & Kim, Final Investigative Report, August 20, 2018, Part VII. 30 Craig McCann and Edward O'Neal, “UBS Succumbed to Conflicts and Purchased $1.7 Billion of Employee to Conflicts and Purchased $1.7 Billion of Employee
Retirement System Bonds into its Puerto Rican Municipal BondRetirement System Bonds into its Puerto Rican Municipal Bond ~~Funds~~ Funds in 2008,” Securitiesin 2008,” Securities Litigation & Consulting Litigation & Consulting
GroupGroup blog, November 6, 2014, http://blog.slcg.com/2014/11/ubs-succumbed-to-conflicts-and.html. blog, November 6, 2014, http://blog.slcg.com/2014/11/ubs-succumbed-to-conflicts-and.html.
28 31 Conway Mackenzie, Conway Mackenzie, Review of the Events and Decisions That Have Led to the Current Financial Crisis ~~of the~~
~~Em ployees Retirem ent System of the Governm ent of Puerto Rico~~ of the Employees Retirement System of the Government of Puerto Rico, October 2010, http://www.slcg.com/pdf/blog/, October 2010, http://www.slcg.com/pdf/blog/
13409.pdf. 13409.pdf.
2932 Craig Craig McCann, EdwardMcCann, Edward O'Neal, and SusanO'Neal, and Susan Song, “UBSSong, “UBS and Santander’s Role in Underwriting Employee Retirement and Santander’s Role in Underwriting Employee Retirement
System Bonds,” SecuritiesSystem Bonds,” Securities Litigation & Consulting GroupLitigation & Consulting Group blog,blog, May 16, 2017, http://blog.slcg.com/2017/05/ubs-and-May 16, 2017, http://blog.slcg.com/2017/05/ubs-and-
santanders-role-in-underwriting.html. See also Nick Brown, “santanders-role-in-underwriting.html. See also Nick Brown, “ Puerto Rico’s Other Crisis: Impoverished Pensions,” Puerto Rico’s Other Crisis: Impoverished Pensions,”
Reuters, April 7, 2016, https://www.reuters.com/investigates/special-report/usa-puertorico-pensions/. Also see David Reuters, April 7, 2016, https://www.reuters.com/investigates/special-report/usa-puertorico-pensions/. Also see David
Evans, “How UBSEvans, “How UBS ~~Spread~~ Spread the Pain of Puerto Rico’s Debt Crisisthe Pain of Puerto Rico’s Debt Crisis to Clients,” Bloomberg,to Clients,” Bloomberg, September 22, 2015, September 22, 2015,
https://www.bloomberg.com/news/articles/2015-09-22/how-ubs-spread-the-pain-of-puerto-rico-s-debt-crisis-to-clients. https://www.bloomberg.com/news/articles/2015-09-22/how-ubs-spread-the-pain-of-puerto-rico-s-debt-crisis-to-clients.
3033 U.S. U.S. Department of Justice, “Department of Justice, “ Former Registered Financial AdvisorFormer Registered Financial Advisor Pleads Guilty to Bank Fraud,”Pleads Guilty to Bank Fraud,” press release, press release,
November 16, 2019, https://www.justice.gov/opa/pr/former-registered-financial-advisor-pleads-guilty-bank-fraud-role-November 16, 2019, https://www.justice.gov/opa/pr/former-registered-financial-advisor-pleads-guilty-bank-fraud-role-
scheme-fraudulently-obtain. Also see Kate McCormick, “scheme-fraudulently-obtain. Also see Kate McCormick, “ Former UBSFormer UBS Insider SaysInsider Says Banks FueledBanks Fueled Economic Crisis in Congressional Research Service 6 Puerto Rico’s Public Debts: Accumulation and Restructuring Bonds and Municipal Finance State and local governments borrow to finance schools, streets, sewers, and other public infrastructure projects, or to support certain private projects, as well as to close short-term gaps between public revenues and outlays. U.S. state and local borrowing totaled over $3 tril ion in mid-2020.34 Municipal securities, such as bonds and notes, are generally exempt from federal taxes. Most states exempt their own securities from tax, though fewer exempt those of other states. Bonds issued by Puerto Rico, with some exceptions, offer a triple exemption from taxes—that is, exempt from federal, state, and local taxes—that made them attractive to municipal mutual fund managers and to high-income households.35 Municipal securities offered on the U.S. mainland are subject to SEC regulation, though securities issued by investment companies based in U.S. territories are not covered by the 1940 Investment Company Act (ICA; P.L. 76-768).36 Municipal—or muni—securities mostly fall into two broad categories. General obligation (GO) bonds are typically~~Economic Crisis in~~
~~Puerto Rico,” May 1, 2018, PBS Frontline, https://www.pbs.org/wgbh/frontline/article/former-ubs-insider-says-banks-~~
~~fueled-economic-crisis-in-puerto-rico/.~~
~~31 Federal Reserve System Board of Governors, “State and Local Governments; Debt Securities and Loans; Liability,~~
~~Level [SLGSDODNS],” https://fred.stlouisfed.org/series/SLGSDODNS.~~
~~32 T he exemption was included in the 1917 Jones Act (P.L. 64-368) and is codified as 48 U.S.C. §745. Employee~~
~~Retirement System (ERS) bonds, for example, did not qualify for certain mainland tax exemptions. See Kobre & Kim~~
~~LLP, Final Investigative Report, August 20, 2018, https://drive.google.com/file/d/19-~~
~~lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, p. 338.~~
~~33 P.L. 115-174 §506, enacted in May 2018, set a three-year phaseout period for that exemption, which the SEC can~~
~~extend for another three years.~~
~~Congressional Research Service~~

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~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~Municipal—or muni—securities mostly fal into two broad categories. General obligation (GO) bonds are typical y~~
backed by a government’s pledge of “ful faith and credit,” backed by the power to tax. Revenue bonds, often backed by a government’s pledge of “ful faith and credit,” backed by the power to tax. Revenue bonds, often
issued by public utilities,issued by public utilities, public corporations, or semi-independent authorities,public corporations, or semi-independent authorities, can be backed by specific cash flows can be backed by specific cash flows
from a project or source—such as sales of water or electricfrom a project or source—such as sales of water or electric power, sewerpower, sewer charges, or highway tol s—orcharges, or highway tol s—or by a by a
broadly applied tax. Revenue bonds, while tied to narrowerbroadly applied tax. Revenue bonds, while tied to narrower income streamsincome streams than GO debt, can qualify for certain than GO debt, can qualify for certain
investor protections.investor protections.3437
Default rates for muni securitiesDefault rates for muni securities ~~historical y~~ historically have been have been ~~wel~~ well below rates for corporate debt, although municipal below rates for corporate debt, although municipal
default rates have risendefault rates have risen in the past two decades. The credit rating agency Moody’s found thatin the past two decades. The credit rating agency Moody’s found that over a 10-year over a 10-year
period (2008-2017) almost 10% of corporate issuances defaulted, but less than 0.5% of municipal issuances did.period (2008-2017) almost 10% of corporate issuances defaulted, but less than 0.5% of municipal issuances did.3538
Major defaults in recent decades include a mismanagedMajor defaults in recent decades include a mismanaged nuclear power project in Washington State,nuclear power project in Washington State, Orange Orange
County in Southern California,County in Southern California, and the City of Detroit.and the City of Detroit.36 39 Arkansas was in default in the 1930s, and severalArkansas was in default in the 1930s, and several states states
and the Territoryand the Territory of Floridaof Florida defaulted or repudiated debts in the 19th century.defaulted or repudiated debts in the 19th century.3740
2013-2015: Fiscal Pressures Intensify
The island’s fiscal condition began to raise widespread concerns in financial markets and among The island’s fiscal condition began to raise widespread concerns in financial markets and among
policymakers in mid-2013, after Detroit filed for municipal bankruptcy and a business magazine policymakers in mid-2013, after Detroit filed for municipal bankruptcy and a business magazine
~~criticized Puerto Rico’s fiscal condition.38 Then-Governor Alejandro García Padil a, who was~~
~~inaugurated in January 2013, hired a team of debt restructuring advisors in early 2014.39~~
~~Ratings on the island’s public debt—which had reached a level roughly equivalent to the island’s~~
~~gross national product (GNP)40—were downgraded in February 2014.41 Following enactment of a~~
~~local bankruptcy law, another round of downgrades put several of the debt ratings for the island’s~~
~~public corporations below investment grade. Ratings for COFINA and GO bonds were also~~

~~34 James E. Spiotto, “T he History and Justification for T imely Payment of Statutory Liens and Pledged Special~~
~~Revenues~~ Puerto Rico,” May 1, 2018, PBS Frontline, https://www.pbs.org/wgbh/frontline/article/former-ubs-insider-says-banks-fueled-economic-crisis-in-puerto-rico/. 34 Federal Reserve System Board of Governors, “State and Local Governments; Debt Securities and Loans; Liability, Level [SLGSDODNS],” https://fred.stlouisfed.org/series/SLGSDODNS. 35 The exemption was included in the 1917 Jones Act (P.L. 64-368) and is codified as 48 U.S.C. §745. Employee Retirement System (ERS) bonds, for example, did not qualify for certain mainland tax exemptions. See Kobre & Kim LLP, Final Investigative Report, August 20, 2018, https://drive.google.com/file/d/19-lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, p. 338. 36 P.L. 115-174 §506, enacted in May 2018, set a three-year phaseout period for that exemption, which the SEC can extend for another three years. 37 James E. Spiotto, “The History and Justification for Timely Payment of Statutory Liens and Pledged Special Revenues Bond Financing in a Chapter 9 Municipal Debt Adjustment Proceeding: Is a Model State Law Necessary or Bond Financing in a Chapter 9 Municipal Debt Adjustment Proceeding: Is a Model State Law Necessary or
Required?”Required?” Municipal Finance Journal, vol. 39(4), winter 2019, pp. 47-97. , vol. 39(4), winter 2019, pp. 47-97.
3538 Moody’s, Moody’s, U.S. Municipal Bond Defaults and Recoveries 1970-2017, July 31, 2018. Excerpt available at , July 31, 2018. Excerpt available at
https://www.treasurer.ca.gov/cdiac/seminars/2019/20190212/day2/6.pdf. https://www.treasurer.ca.gov/cdiac/seminars/2019/20190212/day2/6.pdf.
3639 Michael Johnston, “ Michael Johnston, “~~T he~~The Biggest Municipal Bond Disasters Of All Biggest Municipal Bond Disasters Of All ~~T ime~~Time,” MunicipalBonds.com, ,” MunicipalBonds.com,
https://www.municipalbonds.com/news/the-biggest-municipal-bond-disasters-of-all-time/. https://www.municipalbonds.com/news/the-biggest-municipal-bond-disasters-of-all-time/.
3740 William A. Scott, William A. Scott, Repudiation of State Debts in the United States, (New, (New York: Crowley, 1893), p. 276. York: Crowley, 1893), p. 276. ~~T hose~~Those states states
werewere Alabama, Arkansas, Florida,Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi,Georgia, Louisiana, Mississippi, North Carolina, South Carolina, North Carolina, South Carolina, ~~T ennessee~~Tennessee, and , and
Virginia.Virginia. Also see William B. English, “Understanding the Costs of Sovereign Default: American State Debts in the Also see William B. English, “Understanding the Costs of Sovereign Default: American State Debts in the
1840s,” 1840s,” American Economic Review, vol. 86, no. 1 (March 1996), pp. 259-275. , vol. 86, no. 1 (March 1996), pp. 259-275.
~~38 Andrew Bary, “T roubling Winds: Puerto Rico’s Huge Debt Could Overwhelm Attempts to Revive its Economy,”~~
Barron’s, August 26, 2013.
~~39 Mark T annenbaum and Martin Z. Braun, “Puerto Rico GDB Hires Millstein Unit as Financial Adviser,” Bloomberg,~~
~~March 6, 2014, http://www.bloomberg.com/news/articles/2014-03-05/puerto-rico-gdb-hires-millstein-affiliate-as-~~
~~financial-adviser. Also see Emily Glazer and Mike Cherney, “ Puerto Rico Finance Arm Hires Restructuring Lawyers:~~
~~Government Development Bank for Puerto Rico Hires Cleary Got tlieb Steen & Hamilton,” Wall Street Journal, April~~
~~7, 2014.~~
~~40 GDB, Commonwealth Quarterly Financial Report, July 17, 2014, pp. 41-42, http://www.gdb-pur.com/documents/~~
~~CommonwealthQuarterlyReport71714.pdf. GNP, which measures the value of output created within a given~~
~~jurisdiction, is considered a more accurate indicator of Puerto Rico’s level of economic activity than gross domestic~~
~~product (GDP), which in Puerto Rico is strongly influenced by transactions of multinational corporations that often~~
~~have a tenuous connection to the island’s economy.~~
~~41 Commonwealth of Puerto Rico, Consolidated Annual Financial Report for FY2013, note 22, pp. 230-231,~~
~~http://www.hacienda.gobierno.pr/downloads/pdf/cafr/FINANCIAL_REPORT _2013.pdf.~~
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~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~downgraded.42~~ Congressional Research Service 7 Puerto Rico’s Public Debts: Accumulation and Restructuring criticized Puerto Rico’s fiscal condition.41 Then-Governor Alejandro García Padilla, who was inaugurated in January 2013, hired a team of debt restructuring advisors in early 2014.42 Ratings on the island’s public debt—which had reached a level roughly equivalent to the island’s gross national product (GNP)43—were downgraded in February 2014.44 Following enactment of a local bankruptcy law, another round of downgrades put several of the debt ratings for the island’s public corporations below investment grade. Ratings for COFINA and GO bonds were also downgraded.45 The downgrades and the state of Puerto Rico’s public finances ended the island’s The downgrades and the state of Puerto Rico’s public finances ended the island’s
access to capital markets.access to capital markets.43
46 Last GO Bonds Sold Directly to Hedge Funds in March 2014
Lacking access to normal channels of municipal finance, the island’s government issued $3.5 Lacking access to normal channels of municipal finance, the island’s government issued $3.5
~~bil ion~~ billion in GO bonds to a syndicate of hedge in GO bonds to a syndicate of hedge ~~funds~~funds47 in March 2014—a month after the credit in March 2014—a month after the credit
ratings on the island’s GO bonds had been downgraded to junk status.ratings on the island’s GO bonds had been downgraded to junk status.4448 The bonds carried an The bonds carried an
8.6% yield, 8.6% yield, ~~wel~~ well above usual rates in the municipal finance market.above usual rates in the municipal finance market.4549 The 2014 GO bonds were The 2014 GO bonds were
issued with a provision that New York State law would govern disputes, then viewed as a issued with a provision that New York State law would govern disputes, then viewed as a
~~significant investor protection. Moreover, the Puerto Rico Constitution sets debt service as a top~~
~~priority, before other public outlays.~~
~~About $900 mil ion of the bond proceeds went to pay off bank loans, including to banks involved~~
~~in underwriting the issue.46 SEC staff reportedly recommended actions against bankers involved~~
~~in the deal, including former GDB head Jorge Irizarry, who later led a coalition said to represent~~
~~local junior COFINA bondholders.47 The SEC declined to pursue those charges.48 Investment~~
~~funds Paulson & Company, Och-Ziff Capital,49 Fir Tree Partners, Perry Capital, and Brigade~~
~~Capital reportedly each bought more than $100 mil ion of the issue.50~~

42 Ley para el Cumplimiento con las Deudas y para la Recuperación de las Corporaciones Públicas de Puerto Rico
~~(Ley 71 de 2014; Act 71-2014; Law Pursuant to the Debts and for the Recovery of the Public Corporations of Puerto~~
~~Rico). T he law is also called the “ Recovery Act” or the “ Local Bankruptcy Law” (“ Ley de Quiebra Criolla”).~~
~~43 See Moody’s Investor’s Service, “ Puerto Rico’s Debt Restructuring Law Raises Default Risk for Public Corporations~~
~~and the Commonwealth,” July 3, 2013. Also see Kobre & Kim LLP, Final Investigative Report, August 20, 2018,~~
~~https://drive.google.com/file/d/19-lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, pp. 189-190; and CRS Report~~
~~R44095, Puerto Rico’s Current Fiscal Challenges, by D. Andrew Austin, Puerto Rico’s Current Fiscal Challenges, by~~
~~D. Andrew Austin.~~
~~44 “Fitch Cuts Puerto Rico’s Debt to Junk,” New York Times, February 11, 2014, https://dealbook.nytimes.com/2014/~~
~~02/11/fitch-cuts-puerto-ricos-debt-to-junk/. Downgrades were triggered by warnings that the Government Development~~
~~Bank faced liquidity challenges.~~
~~45 T he Series A bonds—CPR’s sole bond issuance in 2014—offered at 93¢ on the dollar, carry an 8% coupon rate,~~
~~implying an initial yield of 8.6%. T he average yield for Bond Buyer 20-Bond GO Index for 2014 was 4.25%. See WM~~
~~Financial Strategies, “ Rates Over T ime,” November 2020, http://www.munibondadvisor.com/market.htm. T he bond’s~~
~~official statement warned the “ Commonwealth may be unable to honor its obligation to pay debt service on the Bonds,”~~
~~GDB, 2014A GO Bond Official Statement, March 11, 2014, https://web.archive.org/web/20160317092340/http://~~
~~www.gdbpr.com/investors_resources/documents/CommonwealthPRGO2014SeriesA-FinalOS.PDF.~~
~~46 Laura Sullivan, “ How Puerto Rico’s Debt Created A Perfect Storm Before T he Storm,” NPR/Frontline, May 2, 2018,~~
~~https://www.npr.org/2018/05/02/607032585/how-puerto-ricos-debt-created-a-perfect-storm-before-the-storm.~~
~~47 Martin Z. Braun, “SEC Probes Barclays, Morgan Stanley Bankers Over Puerto Rico,” Bloomberg, June 28, 2017,~~
~~https://www.bloomberg.com/news/articles/2017-06-28/sec-probes-barclays-morgan-stanley-bankers-on-puerto-rico-~~
~~bonds. Also see Robert Slavin, “ Morgan Stanley Hires Former GDB President to Attract Puerto Rico Business,”~~ ~~Bond~~
~~Buyer, April 30, 2013. Irizarry later headed the Bonistas del Patio group, which played a role in the COFINA~~
~~restructuring.~~
~~48 Carlos A. Otero, “Concluye sin Acusaciones Pesquisa de la SEC,” [SEC Investigation Concludes without Charges],~~
El Vocero, April 9, 2018, p. 5, https://issuu.com/vocero.com/docs/v04092018__1_/4.
~~49 Och-Ziff changed its name to Sculptor Capital in 2019, two weeks before a deferred prosecution agreement with the~~
~~U.S. Department of Justice related to trade in conflict diamonds and minerals expired. See Sculptor Capital, “ Och -Ziff~~
~~Capital Management Changes Name to Sculptor Capital Management,” press release, September 12, 2019,~~
~~https://www.globenewswire.com/news-release/2019/09/12/1914643/0/en/Och-Ziff-Capital-Management-Changes-~~
~~Name-to-Sculptor-Capital-Management.html. Also see U.S. v. Och-Ziff, Deferred Prosecution Agreem ent, September~~
~~26, 2016, https://www.justice.gov/criminal-fraud/file/900261/download.~~
~~50 Joel Cintrón Arbasetti, “ Vulture Funds have Puerto Rico Cornered,” Center for Investigative Journalism, April 9,~~
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~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~After the 2014 GO issuance, hedge funds expanded their involvement in Puerto Rico, both in~~
~~purchases of bonds as wel as contact with officials and policymakers. The ratings agency Fitch,~~
~~according to reports, found that some 60 hedge funds held about $16 bil ion of Puerto Rico’s~~
~~public debt, about 22% of the total amount, by fal 2014.51 In addition, the investment bank~~
~~Goldman Sachs’s holdings of Puerto Rican debt increased to a reported $1.3 bil ion in 2014.52~~
~~Federal Courts Strike Down Local Bankruptcy Law~~
~~The Puerto Rican government lost access to Chapter 9 of the U.S. Bankruptcy Code, which~~
~~governs the adjustment of municipal debts, in 1984.53 Lacking that access and with major public~~
~~corporations facing severe liquidity chal enges, island policymakers sought to create a path to~~
~~restructuring debts through local laws. In particular, the deterioration of PREPA’s finances and~~
~~operations became evident in spring 2014.54 In August 2014, PREPA, unable to afford fuel,~~
~~signed a restructuring support agreement (RSA) with its creditors, which included appointment of~~
~~an outside chief restructuring officer.55~~
~~In June 2014, Puerto Rico enacted a local bankruptcy law, which heightened concerns of default~~
~~risks.56 The hedge fund Blue Mountain Capital Management, along with the Oppenheimer and~~
~~Franklin mutual fund groups, chal enged the law.57 Other hedge funds reportedly supported the~~
~~law, which would enhance CPR’s ability to pay GO debt by al owing cramdowns of public~~

~~2015, https://periodismoinvestigativo.com/2015/04/vulture-funds-have-puerto-rico-cornered/.~~
~~51 Michael Corkery, “Let Us Help You, Hedge Funds T ell Puerto Rico,” New York Times, September 12, 2014,~~
~~https://dealbook.nytimes.com/2014/09/12/puerto-rico-finds-it-has-new-friends-in-hedge-funds/. Also see Joel Cintrón~~
~~Arbasetti and Carla Minet, “Out in the Open, Hedge Funds in Puerto Rico,” Center for Investigative Journalism, July~~
~~14, 2015, https://periodismoinvestigativo.com/2015/07/out-in-the-open-hedge-funds-in-puerto-rico/.~~
~~52 Brian Chappatta, “Puerto Rico’s 10% Yields Prove T oo T empting for Goldman to Skip,” Bloomberg Business, May~~
~~26, 2015.~~
~~53 P.L. 98-353 amended the Bankruptcy Code to exclude Puerto Rico from the definition of “State” for “the purpose of~~
~~defining who may be a debtor under chapter 9,” which removed Puerto Rico’s access to Chapter 9. See Jon Greenberg,~~
~~“Mystery: Strom T hurmond, Puerto Rico and Bankruptcy Protection,” PolitiFact, April 27, 2016,~~
~~https://www.politifact.com/factchecks/2016/apr/27/john-oliver/mystery-strom-thurmond-puerto-rico-and-bankruptcy-/.~~
~~T he late Judge T orruella, an expert on U.S.-Puerto Rico relations, stated in a concurrence that “ there is no legislative~~
~~record on which to rely for determining Congress’s reasons behind the 1984 Amendments. A tracing of its travels~~
~~through the halls of Congress sheds less light than a piece of coal on a moonless night regardin g the reason for its~~
~~enactment.” Franklin Cal. T ax-Free T r. v. Puerto Rico, 805 F.3d 322, 349 (1st Cir. 2015) (T orruella, J., concurring in~~
~~the judgment), aff’d, Puerto Rico v. Franklin Cal. T ax-Free T r., 136 S. Ct. 1938 (2016).~~
~~54 In June 2014, Municipal Market Analytics (MMA) reported that “ PREPA’s reality is that it is operating deep in the~~
~~red, with antiquated technology, high costs and declining sales.” See T estimony of Robert Donahue, MMA Managing~~
~~Director, in U.S. Congress, House Committee on the Judiciary, Subcommittee on Regulatory Reform, Commercial And~~
~~Antitrust Law, H.R. 870, 114th Cong., 1st sess., February 26, 2015, p. 28, https://www.jonesday.com/files/upload/robert -~~
~~donahue-testimony.pdf.~~
~~55 For details, see CRS Report R44095, Puerto Rico’s Current Fiscal Challenges, by D. Andrew Austin.~~
56 Ley para el Cumplimiento con las Deudas y para la Recuperación de las Corporaciones Públicas de Puerto Rico
~~(Ley 71 de 2014; Act 71; Law Pursuant to the Debts and for the Recovery of the Public Corporations of Puerto Rico).~~
~~T he law was also called the “Recovery Act” or the “Local Bankruptcy Law” (“ Ley de Quiebra Criolla”). See also~~
~~Moody’s Investor’s Service, “ Puerto Rico’s Debt Restructuring Law Raises Default Risk for Public Corporations and~~
~~the Commonwealth,” July 3, 2013.~~
~~57 Carlos F. Ugalde, “Puerto Rico’s Municipal Debt Crisis: A T wo-Front Battle?” Fordham Urban Law Journal, March~~
~~17, 2015, https://news.law.fordham.edu/fulj/2015/03/17/puerto-ricos-municipal-debt-crisis-a-two-front-battle/.~~
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~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~corporations’ debt.58 The Supreme Court struck down the local bankruptcy law,59 holding that,~~
~~although the Bankruptcy Code prevents municipalities in Puerto Rico from seeking relief under~~
~~Chapter 9, the code nonetheless preempted Puerto Rico’s Recovery Act, and thus barred the CPR~~
~~from enacting its own municipal bankruptcy scheme to restructure debt.60~~
~~Governor García Padilla Calls Debt “Unpayable,” Declares Fiscal Emergency~~
~~Then-Governor García Padil a cal ed Puerto Rico’s public debts “unpayable” at the end of June~~
~~2015.61 In the following year, the governor took a series of actions to conserve the government’s~~
~~liquidity in the face of mounting fiscal pressures. At the beginning of August 2015, three smal~~
~~public bond issues were in default.62 At the end of November 2015, Governor Padil a signed an~~
~~executive order authorizing a clawback of balances and revenues from transportation and~~
~~infrastructure entities.63 In April 2016, he signed into law Act 21-2016, which declared that a debt~~
~~service moratorium could be invoked to preserve funding for essential public services.64 As~~
~~Puerto Rico’s defaults widened, Congress considered measures to address the island’s fiscal~~
~~crisis, which culminated in PROMESA’s enactment.~~
~~On June 29, 2016—two days before a $780 mil ion GO debt service payment was due—~~
~~Governor Padil a suspended payments on GO and Commonwealth-guaranteed bonds, leading to~~
~~the first defaults on CPR debt.65 The following day, June 30, 2016, PROMESA was signed into~~
~~law by President Obama to address Puerto Rico’s debts and finances. Before describing~~
~~provisions of PROMESA, the next section analyzes the structure of Puerto Rico’s debt stack.~~
~~Predefault Structure of Puerto Rico’s Public Debts~~
~~Puerto Rico’s fiscal crisis and its accumulations of debt are intertwined with the structure of its~~
~~public sector. This section surveys Puerto Rico’s public debts and briefly discusses how they~~
~~were accumulated. The Puerto Rican government includes a central government—the~~

~~58 Michael Cembalest, “Passage to Puerto Rico,” J.P. Morgan, Eye on the Market , July 11, 2016,~~
~~https://www.jpmorgan.com/directdoc/passagetopuertorico.pdf. A cramdown is a reduction or restructuring of debts~~
~~through a legal procedure that supersedes prior contractual requirements.~~
~~59 Puerto Rico v. Franklin Cal. T ax-Free T r., 136 S. Ct. 1938 (2016). Also see Stephen J. Lubben, “Puerto Rico and the~~
~~Bankruptcy Clause,” American Bankruptcy Law Journal, vol. 88, no. 4 (fall 2014), pp. 553-578 (at p. 573).~~
~~60 See 136 S. Ct. at 1942. Chapter 9 of the Bankruptcy Code defines a municipality as a “political subdivision or public~~
~~agency or instrumentality of a State.” Cf. 11 U.S.C. §101(40). T he Bankruptcy Code thus covers a wider set of public~~
~~entities than the term municipalities usually connotes. In Puerto Rico, municipalities (m unicipios) resemble county~~
~~governments on the mainland.~~
~~61 Mensaje del Gobernador Alejandro García Padilla Sobre Situación Fiscal de Puerto Rico (Governor Alejandro~~
~~García Padilla’s Message on the Fiscal Situation of Puerto Rico), June 29, 2015, https://www.elnuevodia.com/noticias/~~
~~politica/nota/mensajedelgobernadoralejandrogarciapadillasobresituacionfiscaldepuertorico -2066574/.~~
~~62 Puerto Rico Standard & Poors, “Rating on T hree Puerto Rico PFC Series Lowered to ‘D’ On Non -Payment,”~~
~~RatingsDirect , August 3, 2015, http://www.gdb-pur.com/investors_resources/documents/SP-RatingsDirectNews-Aug-~~
~~03-2015.pdf. How clawback funds were used is unclear. See Luis J. Valentín Ortiz, “ Light Shed on Clawed-Back~~
~~Funds,” Caribbean Business, August 24, 2016, https://caribbeanbusiness.com/light-shed-on-clawed-back-funds/.~~
~~63 Gov. Alejandro García Padilla, Executive Order 2015-46, November 30, 2015, https://estado.pr.gov/es/ordenes-~~
~~ejecutivas/.~~
~~64 Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, Act 21 -2016, http://www.lexjuris.com/lexlex/~~
~~Leyes2016/lexl2016021.htm.~~
~~65 Gov. Alejandro García Padilla, Executive Order 2016-30, June 29, 2016, https://www.estado.pr.gov/es/ordenes-~~
~~ejecutivas/. For the July 1, 2016, GO debt service payment, see Act 21-2016 at p. 53. Some other sources cite other~~
~~amounts for that payment.~~
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~~link to page 16 link to page 50~~ ~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~Commonwealth of Puerto Rico (CPR)—as wel as some 50 public corporations.66 These public~~
~~corporations have a wide range of responsibilities, including providing electricity, water and~~
~~sewer service, social services, health care, and maintenance of ports and parks. The island’s~~
~~public debt, issued by 18 distinct public entities, presents an unusual y complex debt structure.~~
~~Transfers and cross-subsidies among different public agencies and corporations, often routed~~
~~through the former Government Development Bank, added to that complexity.67~~
~~Government Development Bank as Fiscal Agent and~~
~~Financial Advisor~~
~~The GDB—the CPR’s former fiscal agent and financial advisor to each governor’s~~
~~administration—had a central role in Puerto Rico’s debt crisis. In postwar decades, it supported~~
~~the island’s industrialization strategy and served a mix of public and private clients. A GDB head~~
~~in 2015 described its role as “real y a combination of things that the Treasury, the New York Fed~~
~~and a development bank like the Inter-American Development Bank do.”68 In particular, the GDB~~
~~controlled debt issuance and negotiated with investment banks. The GDB defaulted on bond~~
~~payments in May 2016. In 2017, the newly formed Fiscal Agency and Financial Advisory~~
~~Authority (FAFAA) assumed most of GDB’s functions.69~~
~~Categories of Public Debt~~
~~Restructuring Puerto Rico’s finances has involved complex disputes among bondholders invested~~
~~in different types of Puerto Rico’s public debt. This section outlines the structure of the island’s~~
~~public debts. Since Puerto Rico lost access to credit markets in late 2014, its current debt structure~~
~~has been largely unchanged, aside from the runoff of short-term notes, the 2018 wind-down of the~~
~~GDB, and the 2019 restructuring of sales-tax-backed COFINA bonds (COFINA—an acronym for~~
~~the Corporación del Fondo de Interés Apremiante—is also known as the Puerto Rico Sales Tax~~
~~Financing Corporation). Figure 2 and Table A-1 show debt levels as of the end of July 2016.~~

66 Oficina de Gerencia y Presupuesto (Puerto Rico Office of Management and Budget; OGP), Organigrama
~~(Organization Chart), March 2, 2017, http://ogp.pr.gov/SobreOGP/Pages/organigrama.aspx. T hat version depicted 128~~
~~government entities. Former Governor Ricardo Rosselló Nevares (2017-2019) consolidated some smaller public~~
~~corporations into central government departments.~~
~~67 For example, a disclosure for the March 2014 NY Law GO bond issue stated (p. II -74) “GDB, however, has provided~~
~~financing in the past and may continue to provide financing to governmental entities that do not have sufficient~~
~~independent resources to cover their operating expenses, to the extent permitted by law.” CPR, 2014A GO Bond~~
Official Statem ent, March 14, 2020, https://emma.msrb.org/ER892398-ER588507-ER990528.pdf.
~~68 Mary Williams Walsh and Michael Corkery, “Behind Puerto Rico’s Woes, a Broadly Powerful Development Bank,”~~
New York Tim es, November 29, 2015; and Arturo C. Porzecanski, “ T he Government Development Bank: At the Heart
~~of Puerto Rico’s Financial Crisis,” American University working paper, September 18, 2014,~~
~~http://auapps.american.edu/aporzeca/www/~~
~~T he%20GDB%20at%20the%20Heart%20of%20Puerto%20Ricos%20Financial%20Crisis.pdf .~~
~~69 Enabling Act of the Fiscal Agency and Financial Advisory Authority , Act 2 of 2017, January 18, 2017,~~
~~https://www.aafaf.pr.gov/wp-content/uploads/a-002-2017-1.pdf.~~
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~~Figure 2. Puerto Rico’s Public Debt as of July 31, 2016, in $Bil ions~~

Source: CRS calculations based on Commonwealth Statement, December 18, 2016, https://web.archive.org/web/20170101045953/http://bgfpr.com/documents/
~~CommonwealthofPuertoRicoFinancialInfoFY201612-18-16.pdf.~~
Notes: Some items may not sum to totals due to rounding. This figure excludes debt of the Government Development Bank to minimize double counting. See source
~~document for other important notes and caveats.~~
~~CRS-12~~

~~link to page 50~~ ~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~Unfunded obligations of Puerto Rico’s pension systems, which were estimated at $49 bil ion as of~~
~~June 2015, are not included.70 Puerto Rico’s public debt, after adjustments to avoid double-~~
~~counting, totaled $68.7 bil ion at the end of July 2016.71~~
~~These debts can be divided by the source of funds used to repay them,72 namely~~
~~1. the Commonwealth’s General Fund;~~
~~2. the sales & use tax or other specific revenue sources;~~
~~3. public corporations’ revenues;~~
~~4. other debts, including local governments (municipios) and nonrecourse debt.73~~
~~By July 2016, the category of debt repaid through the General Fund included $12.7 bil ion in GO~~
~~debt backed by the good faith, credit, and taxing power of the Commonwealth, as wel as~~
~~$4.2 bil ion in Public Building Authority debt, most of which carried a CPR guarantee. Another~~
~~$25.5 bil ion of Puerto Rico’s public sector debt was payable from selected tax receipts, including~~
~~$17.3 bil ion in COFINA bonds. An additional $11.5 bil ion was payable through Commonwealth~~
~~appropriations. Outstanding bonds for the island’s largest public corporations, PREPA ($9.0~~
~~bil ion) and PRASA ($4.6 bil ion), are mostly repaid through utility charges.~~
~~Public Debt and the Puerto Rico Constitution~~
~~The Puerto Rican Constitution’s provisions related to budgets and debt have played a central role~~
~~in the process of restructuring the island’s public debts.74 Puerto Rico treated public corporations~~
~~as legal y separate from the island’s central government,75 although in practice governors largely~~
~~have controlled them indirectly via appointments of those corporations’ boards.76 Debts of most~~
~~public corporations were also considered as separate from debts of the central (CPR) government.~~
~~Five key fiscal policy clauses in the Puerto Rico Constitution are~~
~~ a balanced budget requirement that appropriations (asignaciones aprobadas)~~
~~not exceed available resources (los recursos disponibles) (Article VI, Section 8);~~

~~70 GDB, Commonwealth Statement, December 18, 2016, p. 222, https://web.archive.org/web/20170101045953/http://~~
~~bgfpr.com/documents/CommonwealthofPuertoRicoFinancialInfoFY201612-18-16.pdf.~~
~~71 Ibid. Also see Table A-1.~~
~~72 For a detailed discussion of different categories of public debts, see GDB, Commonwealth Statement, December 18,~~
~~2016, pp. 172-208.~~
~~73 T he Children’s Fund, which comprises most of the nonrecourse debt, stems from settlements of 1990s tobacco suits.~~
~~Archived CRS Report RL30058,~~ ~~Tobacco Master Settlem ent Agreem ent (1998): Overview, Im plem entation by States,~~
~~and Congressional Issues, by C. Stephen Redhead, is available to congressional clients upon request.~~
~~74 T he English version of the Puerto Rico Constitution is available at https://web.archive.org/web/20130302224519/~~
~~http://www.oslpr.org/english/PDF/~~
~~T he%20Constitution%20of%20the%20Commonwealth%20of%20Puerto%20Rico.pdf .~~
~~75 For instance, the law (Act 83 of 1941; 22 L.P.R.A. §193) creating PREPA’s predecessor states that “debts,~~
~~obligations, contracts, bonds, notes, promissory notes, receipts, expenses, accounts, funds, companies and property of~~
~~the Authority, its officers, agents or employees, should be understood to be of the said governmentally controlled~~
~~corporation and not of the central government.”~~
~~76 Geoff G. Burrows, “T he New Deal in Puerto Rico: Public Works, Public Health, and the Puerto Rico Reconstruction~~
~~Administration, 1935-1955,” City University of New York (CUNY) dissertation, 2014,~~
~~https://academicworks.cuny.edu/gc_etds/315.~~
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~~link to page 21~~ ~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

 a priority for payment of interest and principal for securities backed by the
“full faith and credit” of the Puerto Rico government in the case of a budgetary
~~shortfal (Article VI, Section 8);~~
~~ a “clawback” provision, mandating the reapplication of revenues to debt service~~
~~of full faith and credit pledges (Article VI Section 2);~~
~~ a prohibition on issuance of new GO debt if average debt service costs over the~~
~~two preceding fiscal years equaled or exceeded 15% of the average of total~~
~~revenues for those two years (Article VI Section 2);77~~
~~ a 30-year limit on GO bond maturities, except for housing bonds, which were~~
~~permitted maturities of up to 40 years (Article VI, Section 2).~~
~~The stringency of those provisions, however, was loosened in several ways. A 1974 Puerto Rico~~
~~Attorney General’s opinion held that bond proceeds counted as “available resources,” thus~~
~~relaxing the balanced budget requirement.78 The 15% limit and the 30-year maturity limit were~~
~~considered to apply only to central government GO debt, not to so-cal ed “extraconstitutional”~~
~~debt of public corporations and COFINA. The GDB, by serving as a conduit for transferring~~
~~resources between the central government and other public entities, also weakened the effective~~
~~distinction between “constitutional” and “extraconstitutional” debt.79 Moreover, some have~~
~~contested whether some post-2012 debt issues conformed to the 15% limit, as wel as the reach of~~
~~clawback measures used to bolster resources for payment of GO debt. Interpretations of those~~
~~constitutional limits have shaped much of the island’s public finance policy as wel as PROMESA~~
~~Title III litigation, which later sections describe.80~~
~~PROMESA Enacted in 2016 to Address the Crisis~~
~~PROMESA (P.L. 114-187), as noted above, established two debt adjustment processes and a~~
~~Financial Oversight and Management Board for Puerto Rico, among other provisions.81 Title II of~~
~~PROMESA endowed the FOMB with wide authorities, while the governor and legislature of~~
~~Puerto Rico retained substantial control over public priorities, within the constraints of Board-~~
~~certified fiscal plans and other PROMESA provisions.~~

~~77 T his limit was interpreted as “15% of the average annual revenues raised under the provisions of Commonwealth~~
~~legislation and deposited into the treasury (… ‘internal revenues’) in the two fiscal years preceding the fiscal year of~~
~~such proposed issuance. Internal revenues consist principally of income taxes, sales and use taxes (other than those~~
~~assigned to COFINA) and excise taxes.” GDB, Commonwealth Statement, December 18, 2016, p. 177.~~
~~78 P.R. Op. Sec. Just. 1974-15, 1974 WL 326062 (P.R. Atty. Gen.). Also see Carlos Colón De Armas, “La Constitución~~
~~de Puerto Rico y Su Requisito de un Presupuesto Balanceado,” [Puerto Rico’s Constitution and its Balanced Budget~~
~~Requirement], Law Review of the University of Puerto Rico , vol. 85, no. 3 (2016), pp. 819-832; and Sergio M.~~
~~Marxuach, “ T he Endgame: An Analysis of Puerto Rico’s Debt Structure and the Arguments in Favor of Chapter 9,”~~
~~Center for a New Economy working paper, November 30, 2015, http://bit.ly/2aBM7X3.~~
~~79 Arturo C. Porzecanski, “T he Government Development Bank: At the Heart of Puerto Rico’s Financial Crisis,”~~
~~American University working paper, September 18, 2014, http://auapps.american.edu/aporzeca/www/~~
~~T he%20GDB%20at%20the%20Heart%20of%20Puerto%20Ricos%20Financial%20Crisis.pdf .~~
~~80 For instance, see “ Restructuring COFINA and GO Bonds.”~~
~~81 See CRS Report R44532,~~ ~~The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA; H.R.~~
~~5278, S. 2328), coordinated by D. Andrew Austin.~~
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~~Oversight Board Appointments and Organization~~
~~The Oversight Board plays a central role in the restructuring process. At the end of August 2016,~~
~~President Obama appointed six members from nomination lists compiled by congressional~~
~~leaders and a seventh of his own choosing.82 The Puerto Rico governor was empowered to~~
~~appoint a nonvoting representative to the Board. The Board chose José B. Carrión, an island~~
~~insurance broker, as chair.83~~
~~Litigation questioning the Board’s compliance with the U.S. Constitution’s Appointments Clause~~
~~delayed the renomination or replacement of the original members, whose three-year terms~~
~~expired in August 2019. The Supreme Court rejected those chal enges in June 2020, clearing the~~
~~way for new nominations and appointments.84~~
~~The Oversight Board chooses which instrumentalities wil be “covered.”85 The Board can require~~
~~the CPR government and covered instrumentalities to submit fiscal plans and budgets, which are~~
~~subject to Board approval. In September 2016, the Oversight Board listed the CPR government as~~
~~a covered territory and 62 public corporations and other entities as covered instrumentalities.86~~
~~The Board also represents covered entities in debt restructuring processes set up by PROMESA.~~
~~PROMESA Established Two Paths to Restructure Debt~~
~~PROMESA’s Title III establishes a debt restructuring process that draws on Chapters 9 and 11 of~~
~~the U.S. Bankruptcy Code.87 Title VI establishes a debt restructuring process for voluntary~~
~~collective action agreements, similar to procedures used in some sovereign debt negotiations.~~
~~Chief Justice John Roberts selected U.S. District Court Judge Laura Taylor Swain to oversee~~
~~PROMESA Title III processes in proceedings in San Juan and New York.~~
~~Chapter 9 of the U.S. Bankruptcy Code88 and Debt Restructuring under~~
~~PROMESA Title III~~
~~Congress first enacted a municipal bankruptcy law during the Great Depression of the 1930s to al ow local~~
~~governments to reorganize their debts under the supervision of a federal court.89 State governments cannot file~~

~~82 White House, “ President Obama Announces the Appointment of Seven Individuals to the Financial Oversight and~~
~~Management Board for Puerto Rico,” press release, August 31, 2016, https://obamawhitehouse.archives.gov/the-press-~~
~~office/2016/08/31/president -obama-announces-appointment-seven-individuals-financial.~~
~~83 Mr. Carrión’s relatives have served in various leadership roles in Banco Popular, the island’s largest bank. Guillermo~~
~~A. Baralt, Tradition into the Future: The First Century of the Banco Popular de Puerto Rico: 1893 -1993 (San Juan:~~
~~Banco Popular, 1993). José Carrión was brother-in-law of Pedro Pierluisi Urrutia, Resident Commissioner at the time.~~
~~84 Financial Oversight and Management Bd. for Puerto Rico v. Aurelius Investment, LLC, 590 U. S. ___ (2020),~~
~~https://www.supremecourt.gov/opinions/19pdf/18-1334_8m58.pdf.~~
~~85 PROMESA §101(d)(1).~~
~~86 Oversight Board, “Covered Entities List,” November 18, 2016, https://drive.google.com/file/d/~~
~~1D37UiofV0T 5s1Q4J54vs3xX_ArGF9532/view.~~
~~87 See the appendix of CRS Report R44532,~~ ~~The Puerto Rico Oversight, Management, and Economic Stability Act~~
~~(PROMESA; H.R. 5278, S. 2328), coordinated by D. Andrew Austin, for a listing of Bankruptcy Code provisions~~
~~incorporated into T itle III.~~
~~88 See CRS Report R45137, Bankruptcy Basics: A Primer, by Kevin M. Lewis; and CRS Legal Sidebar LSB10116,~~
When the City Goes Broke: Pensions, Retirees, and Municipal Bankruptcies, by Kevin M. Lewis.
~~89 U.S. Courts, “Chapter 9—Bankruptcy Basics,” https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-~~
~~basics/chapter-9-bankruptcy-basics. Also see Michael W. McConnell and Randal C. Picker, “ When Cities Go Broke: a~~
~~Conceptual Introduction to Municipal Bankruptcy,” University of Chicago Law Review, vol. 60(2), spring 1993, pp.~~
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~~for bankruptcy, but may al ow—or bar—their municipalities to seek protection from creditors under provisions of~~
~~Chapter 9 of the Bankruptcy Code. The code defines “municipality” as a “political subdivision or public agency or~~
~~instrumentality of a State,” which includes not only towns and cities, but also school districts, utility districts, and~~
~~public authorities responsible for roads, bridges, water, sewers, and other publicly provided services.90~~
~~A municipality may only receive Chapter 9 protections if several conditions are met: its state government~~
~~approves; it is insolvent; it wishes to implement a “plan of adjustment”; and it negotiates with creditors in good~~
~~faith or demonstrates such negotiations are impracticable.91 A municipality’s petition stays creditors from taking~~
~~action to col ect debts, within certain limits and subject to certain chal enges. A bankruptcy court, however,~~
~~cannot control a municipality’s regular operations, with some narrow exceptions.92 A municipality’s final plan of~~
~~adjustment, typical y the result of negotiations with creditor groups, is subject to a federal judge’s confirmation.~~
~~The PROMESA Title III process largely fol ows procedures of Chapter 9 of the Bankruptcy Code, although it adds~~
~~some requirements and omits others.93 First, Title III uses the terms “covered territory”—meaning Puerto Rico—~~
~~and “covered territorial instrumentalities” rather than “municipality.” Second, Title III, unlike Chapter 9, does not~~
~~require insolvency as a prerequisite to seeking protection from creditors. Other differences are that the Oversight~~
~~Board decides which public entities are covered territorial instrumentalities, chooses whether they can seek debt~~
~~relief, and represents those entities through the Title III process.94 PROMESA requires formulation and~~
~~certification of Fiscal Plans for covered entities,95 which are necessarily integrated with debt restructuring plans.~~
~~Filing a Title III relief petition triggers an initial stay of litigation, although creditors may chal enge the petition~~
~~afterward.96~~
~~Major Title III cases have involved multiple issuers of debt because those entities’ fiscal relations were entwined,~~
~~which has complicated negotiations with creditor representatives. The Oversight Board has, with the approval of~~
~~the Title III court, used its authority to appoint agents to represent interests of bondholders and other creditors.97~~
~~The court also appointed a mediation team headed by Judge Barbara Houser to oversee negotiations.98 A plan~~
~~support agreement (PSA) outlines terms of negotiations and may be modified as additional parties sign on or as~~
~~terms shift.~~
~~The Oversight Board is charged with proposing a plan of adjustment to implement negotiated terms of the~~
~~restructuring. That plan may involve proposals to modify Puerto Rican laws, regulations, and fiscal plans. The~~
~~Puerto Rican government and legislature retain broad powers to control public operations aside from other~~
~~PROMESA strictures.99 Obtaining legislative or regulatory changes consistent with the plan of adjustment is one~~
~~prerequisite of court confirmation of the plan.100~~

~~425-495.~~
~~90 11 U.S.C. §101(40).~~
~~91 T hat condition also may be met by reaching agreement with creditors holding a majority of claims in each affected~~
~~class, or if the municipality reasonably believes a creditor may try to obtain a preferential transfer. 11 U.S.C.~~
~~§109(c)(5).~~
~~92 11 U.S.C. §904.~~
~~93 For a list of provisions referenced in PROMESA T itle III, see Appendix B of CRS Report R44532,~~ ~~The Puerto Rico~~
~~Oversight, Managem ent, and Economic Stability Act (PROMESA; H.R. 5278, S. 2328)~~ ~~, coordinated by D. Andrew~~
~~Austin.~~
~~94 PROMESA §§206, 304, 312, 315; 48 U.S.C. §§2146, 2164, 2172, 2175.~~
~~95 PROMESA §201; 48 U.S.C. §2141.~~
~~96 PROMESA §304; 48 U.S.C. §2164.~~
~~97 PROMESA §104; 48 U.S.C. §2124. Also see Stipulation and Order Approving Procedure to Resolve~~
~~Commonwealth-COFINA Dispute, In re CPR, case 17-03283-LTS, August 10, 2017, https://cases.primeclerk.com/~~
~~puertorico/Home-DownloadPDF?id1=NzAwNDI5&id2=0.~~
~~98 In re: CPR, case 17-03283-LTS, Order Appointing Mediation Team , June 23, 2017, https://cases.primeclerk.com/~~
~~puertorico/Home-DownloadPDF?id1=NjU3Njgy&id2=0. T he team was appointed under terms of 11 U.S.C. §105.~~
~~Barbara Houser had been chief bankruptcy judge of the U.S. Bankruptcy Court for the Northern District of T exas.~~
~~99 PROMESA §§303, 314; 48 U.S.C. §§2163, 2174.~~
~~100 PROMESA §314; 48 U.S.C. §2174(b)(5).~~
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~~The Oversight Board, as agent of the debtor, must file a disclosure statement for a plan of adjustment to inform~~
~~creditors.101 If the Title III court holds that the disclosure statement is adequate, creditors vote on the plan of~~
~~adjustment. Creditors holding the same or similar types of debt or claims are divided into classes, as specified in~~
~~the plan of adjustment. Creditors within classes whose claims would be impaired by the plan vote to approve or~~
~~reject it. Approval of at least one class of impaired creditors is required. Other requirements for confirmation by~~
~~the Title III court include that the plan was proposed in good faith, that it is feasible and in the best interests of~~
~~creditors, and that it conforms to a Board-certified fiscal plan.102 After approval, creditors are compensated~~
~~according to the plan, in cash, in new bonds, or in other ways, equal to payment in ful , nothing, or some~~
~~intermediate amount.~~
~~Restructuring COFINA and GO Bonds~~
~~Disputes over the legal and constitutional foundation for tax-backed bonds and for certain other~~
~~bonds have played a central role in Puerto Rico’s debt restructuring, even before PROMESA’s~~
~~enactment. In particular, controversies over the relative priority of GO debt claims and claims of~~
~~sales-and-use-tax-backed COFINA debt split investor groups.~~
~~Some suspected that issuing COFINA bonds sidestepped a limitation on debt issuance in the~~
~~Puerto Rico Constitution, an accusation denied by others.103 COFINA bonds were sold as~~
~~“extraconstitutional” debt, meaning that bond proceeds and tax revenues supporting debt service~~
~~were not to be considered as “available resources” to the CPR. Bond documents asserted that~~
~~COFINA proceeds were therefore protected from “clawback,” that is, the invocation of a~~
~~provision of the Puerto Rican Constitution prioritizing payment of GO debt service.104 While the~~
~~Puerto Rican government obtained opinions from mainland law firms and the Puerto Rican~~
~~Attorney General that COFINA funds would not be subject to clawback, at least one mainland~~
~~law firm partner expressed doubt that a court would bar clawback of COFINA funds—an opinion~~
~~not shared with investors.105 In 2009, bond filings began to note, in general terms, the potential~~
~~legal risks presented by COFINA’s structure.106~~
~~Some major mutual funds, which had bought Puerto Rico securities at par when issued before the~~
~~island’s fiscal chal enges became evident, sharply reduced their holdings of the island’s public~~
~~debt in late 2013 and 2014, prompting sharp drops in bond prices.107 A significant portion of those~~
~~sales were to hedge funds with a stronger appetite for complex debt restructuring processes.108~~
~~Many GO bondholders believed that restructuring the island’s public corporations’ debts or~~
~~clawing back COFINA revenues could help the government meet GO bond obligations,~~

~~101 PROMESA §§301, 310; 11 U.S.C. §1125.~~
~~102 PROMESA §314; 48 U.S.C. §2174(b); 11 U.S.C. §1129.~~
~~103 William Isaac, “Banks Have Huge Stake in Outcome of Puerto Rico Crisis,” American Banker, November 5, 2015,~~
~~https://www.americanbanker.com/opinion/banks-have-huge-stake-in-outcome-of-puerto-rico-crisis. T he 2018 Kobre &~~
~~Kim report claimed the GDB sought to compute the 15% debt limitation appropriately.~~
~~104 Official Statement, “Puerto Rico Sales T ax Financing Corporation Sales T ax Revenue Bonds, Series 2007B,” July~~
~~23, 2007, https://emma.msrb.org/MS261958-MS237266-MD462937.pdf.~~
~~105 Kobre & Kim LLP, Final Investigative Report, August 20, 2018, https://drive.google.com/file/d/19-~~
~~lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, pp. 160-161, 164-165, 174-175.~~
~~106 Ibid., pp. 187-188.~~
~~107 Bond Buyer, “Oppenheimer, Franklin Cut Puerto Rico Debt Holdings Amid Rally,” September 12, 2018.~~
~~108 Matt Wirz, Andrew Scurria, and Heather Gillers, “Bond Funds Dump Puerto Rico: Investor Exodus from Puerto~~
~~Rico Built Speed in October,” Wall Street Journal, October 25, 2017, https://www.wsj.com/articles/bond-funds-dump-~~
~~puerto-rico-1508929380.~~
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~~prompting contention with COFINA bondholder groups.109 Conflicts also emerged between~~
~~senior COFINA bondholders, which included several mainland financial institutions and hedge~~
~~funds, and junior COFINA bondholders, who tended to be individual residents of Puerto Rico.110~~
~~Much of the COFINA-GO litigation included coalitions of major bondholders, such as the Ad~~
~~Hoc Group of Puerto Rico GO Bondholders, the COFINA Senior Bondholders Coalition, and the~~
Bonistas del Patio, a group claiming to represent island-based junior COFINA bondholders.111
~~Three bond insurers (Ambac, National Public Finance, and Assured Guaranty), also known as~~
~~monolines, also participated actively in negotiations and litigation.112 These groups played a role~~
~~in congressional deliberations that led to PROMESA’s enactment.~~
~~The constitutional fiscal provisions became more salient as the prospect of a default of Puerto~~
~~Rico’s government loomed, triggering heightened tensions among bondholders. In July 2016, a~~
~~group of GO bondholders sued then-Governor García Padil a to demand a clawback of COFINA-~~
~~pledged revenues. In April 2017, a federal appeals court held that PROMESA stay provisions~~
~~applied.113 That suit and other litigation, however, convinced the Oversight Board that the GO-~~
~~COFINA dispute needed to be resolved through the PROMESA Title III process.114~~
~~New Governor Inaugurated in January 2017~~
~~In January 2017, Governor Ricardo Rossel ó Nevares succeeded Governor García Padil a, who~~
~~did not seek reelection.115 The new governor took steps to restructure the island government,~~
~~including setting up FAFAA,116 which took over financial management roles from the GDB.~~
~~Rothschild & Co. were brought in to replace previous restructuring advisors.117 The new governor~~
~~abandoned the PREPA RSA and revamped PREPA’s governance by letting the chief restructuring~~
~~officer’s contract lapse and replacing the PREPA board appointed in 2017 with his own~~

~~109 Michael Cembalist, “Passage to Puerto Rico,” J.P. Morgan, Eye on the Market, July 11, 2016,~~
~~https://www.jpmorgan.com/directdoc/passagetopuertorico.pdf.~~
~~110 Joanisabel González, “COFINA Bondholders Head to Boston,” El Nuevo Día, March 16, 2017,~~
~~https://www.elnuevodia.com/english/english/nota/cofinabondholdersheadtoboston-2301236/.~~
~~111 Joel Cintrón Arbasetti and Carla Minet, “Old Colleagues Gather in a Group that Requires Puerto Rico to Pay the~~
~~Debt,” Center for Investigative Journalism, October 24, 2017, http://periodismoinvestigativo.com/2017/10/old-~~
~~colleagues-gather-in-a-group-that -requires-puerto-rico-to-pay-the-debt/. Joel Cintrón Arbasetti and Carla Minet, “ Map~~
~~of the Players and their Positions in the Puerto Rico Debt Game,” Center for Investigative Journalism, July 23, 2015,~~
~~http://periodismoinvestigativo.com/2015/07/map-of-the-players-and-their-positions-in-the-puerto-rico-debt-game/.~~
~~112 Heather Gillers, “ Bond Insurers Prepare for the Worst in Puerto Rico,” Wall Street Journal, June 30, 2016.~~
~~113 Order and Opinion, Lex Claims, LLC, et al. v. Garcia-Padilla, et al, case 17-1241, April 4, 2017,~~
~~media.ca1.uscourts.gov/pdf.opinions/17-1241P-01A.pdf.~~
~~114 Jaresko Declaration, In re: COFINA, p. 10, January 12, 2019, https://cases.primeclerk.com/puertorico/Home-~~
~~DownloadPDF?id1=OT AxNzgz&id2=0.~~
~~115 His father, Pedro Rosselló González, served as governor of Puerto Rico from 1993 until 2001. Former Governor~~
~~García Padilla supports maintaining Puerto Rico’s current status. Former Governor Rosselló Nevares and current~~
~~Governor Pedro Pierluisi Urrutia advocate statehood for Puerto Rico. Divergent views on Puerto Rico’s political status~~
~~have traditionally distinguished the island’s political parties in the postwar era.~~
~~116 Act 2 of 2017, January 18, 2017, and Oversight Board, “Covered Entities List,” November 18, 2016,~~
~~https://drive.google.com/file/d/1D37UiofV0T 5s1Q4J54vs3xX_ArGF9532/view.~~
~~117 Eric Platt, “ Rothschild to Advise Puerto Rico on $69bn Debt Restructuring,” Financial Times, January 18, 2017,~~
~~https://www.ft.com/content/b00acb45-341b-3501-888a-4685fc9ee4e6.~~
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~~appointees.118 Rossel ó Nevares also disbanded a commission set up by his predecessor to audit~~
~~the island’s public debts.119~~
~~Oversight Board Files PROMESA Title III Petitions in May 2017~~
~~PROMESA required the Oversight Board to take several steps to restructure debts. In an initial~~
~~step, as noted above, the Board listed the CPR and the bulk of the island’s public corporations as~~
~~covered instrumentalities under terms of PROMESA.120 That designation required the governor to~~
~~draft fiscal plans for the CPR and covered instrumentalities, whether or not the instrumentalities’~~
~~debts were to be restructured. Fiscal plans and budgets are subject to certification by the Board,~~
~~which can impose its own plan if the governor’s draft is deemed inadequate.~~
~~Where the Board viewed debt restructuring as necessary, the next step was to petition a federal~~
~~district court to initiate PROMESA Title III proceedings. The subsequent steps that put the GO-~~
~~COFINA dispute into the Title III court followed in rapid succession in late April and early May~~
~~2017. Puerto Rico enacted a measure to claw back COFINA funds to the general fund,121~~
~~triggering a default declaration on COFINA bonds on May 4, 2017.122 A day before, on May 3,~~
~~2017, the FOMB filed a petition to restructure CPR’s obligations under Title III of PROMESA.123~~
~~On May 5, 2017, the Board then filed a Title III petition for COFINA,124 and on May 21, 2017, it~~
~~filed a petition for HTA.125 The Board also initiated a Title III process for PREPA on July 2, 2017,~~
~~and thus rejected the previous RSA framework.126~~
~~The Board also used PROMESA Title VI, which sets out a different procedure, to settle debts and~~
~~operations of the GDB. The Board approved the GDB’s restructuring petition in July 2017, and~~
~~the bank was dissolved in November 2018.127 Most of its functions, as noted above, were taken~~
~~over by the FAFAA.~~

~~118 T he PREPA RSA of November 2015 specified that the Puerto Rican governor choose a board of three members~~
~~from a list “of at least 10 candidates prepared by a recognized firm in the field of search for executive candidates,~~
~~according to objective criteria that take into account professional and educational backgrounds.” See GDB,~~
~~Restructuring Support Agreement, November 2, 2015, p. 98, at http://www.gdb-pur.com/investors_resources/~~
~~documents/PREPA-RSA-RestructuringSupportAgreement -FullyExecuted.pdf. Rosselló’s 2016 campaign treasurer was~~
~~appointed chair of the PREPA board. See Javier Balmaceda, “Puerto Rico ’s PREPA Privatization: A Sale T oo Private,”~~
~~Forbes~~~~, April 3, 2018, https://www.forbes.com/sites/debtwire/2018/04/03/puerto-ricos-prepa-privatization-a-sale-too-~~
~~private/?sh=4a5358a27490.~~
~~119 Gloria Ruiz Kuilan, “Rosselló Elimina la Comisión para la Auditoría de la Deuda,” El Nuevo Día, April 19, 2017,~~
~~https://www.elnuevodia.com/noticias/politica/notas/rossello-elimina-la-comision-para-la-auditoria-de-la-deuda/. See~~
~~further discussion in the section “ An Audit of Puerto Rico’s Public Debt .”~~
~~120 PROMESA §101(d)(1)(A).~~
~~121 Fiscal Plan Compliance Act, Act 26-2017, April 29, 2017.~~
~~122 Robert Slavin, “COFINA T rustee Declares Default; Seniors Call for End of Subordinate Payments,” Bond Buyer,~~
~~May 10, 2017. Also see Bank of New York Mellon, letter to COFINA T rustees, May 4, 2017,~~
~~https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NjIwMzQ1&id2=0.~~
~~123 Financial Oversight and Management Board (FOMB),~~ ~~Petition for Relief on Behalf of the Commonwealth of Puerto~~
~~Rico, May 3, 2017, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NjE3NjAy&id2=0.~~
~~124 FOMB, Petition for Relief on Behalf of COFINA, May 5, 2018, https://cases.primeclerk.com/puertorico/Home-~~
~~DownloadPDF?id1=NjE3ODQx&id2=0.~~
~~125 FOMB, Petition for Relief on Behalf of HTA, May 21, 2017, https://cases.primeclerk.com/puertorico/Home-~~
~~DownloadPDF?id1=NjIzMjkw&id2=0.~~
~~126 FOMB, Petition for Relief on Behalf of PREPA, July 2, 2017, https://cases.primeclerk.com/puertorico/Home-~~
~~DownloadPDF?id1=NzA4NjU1&id2=0.~~
~~127 In re: GDB, Findings of Fact, Conclusions of Law, and Order, November 7, 2018, https://document.epiq11.com/~~
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~~Judge Swain then directed the Oversight Board to resolve disputes among GO and COFINA~~
~~creditors through confidential mediation overseen by a senior bankruptcy judge. On August 10,~~
~~2017, Judge Swain appointed the Unsecured Creditors Committee (UCC) to represent~~
~~Commonwealth interests and Bettina Whyte to represent COFINA interests.128 Negotiations were~~
~~surrounded by a cascade of litigation by various interested parties.129~~
~~Hurricanes Irma and María Hit Puerto Rico in September 2017~~
~~Two Category 5 hurricanes soon stal ed progress in those negotiations. In September 2017,~~
~~Hurricane Irma skirted the northern edge of Puerto Rico, and two weeks later, Hurricane María~~
~~passed over the whole island, leaving major damage in its wake.130 The hurricanes affected the~~
~~debt restructuring process in several ways. First, the island’s electrical grid was disabled, which~~
~~crippled many water and sewer facilities, as wel as most manufacturing facilities and~~
~~transportation systems. Health, housing, and incomes also were affected. Second, the disaster~~
~~responses commanded the attention of public officials and others. The hurricanes’ damage to~~
~~public infrastructure, including the island’s electrical grid, and to private businesses, including~~
~~most manufacturing facilities, prompted the Oversight Board to revise the Commonwealth’s~~
~~fiscal plan to reflect reduced economic activity and tax revenues. The Board anticipated that~~
~~federal disaster recovery funding—which it estimated would total $82 bil ion—would enhance~~
~~the ability to repay creditors in future years.131 Much of that funding, however, has been slow in~~
~~coming.132~~
~~Settling the COFINA/GO Dispute~~
~~The COFINA Senior Bondholders Coalition, a coalition of hedge funds and investment groups,~~
~~played a central role in negotiations that led to a settlement of the COFINA/GO dispute over~~
~~payment priority. The coalition controlled about a third of outstanding senior COFINA debt and~~
~~substantial amounts of COFINA subordinate (junior) bonds. In June 2015, the coalition retained~~
~~the law firm Quinn Emanuel and lead counsel Susheel Kirpalani.133~~

~~document/getdocumentbycode/?docId=3427095&projectCode=PR4&source=DM.~~
~~128 Stipulation and Order Approving Procedure to Resolve Commonwealth -COFINA Dispute, In re FOMB as~~
~~Representative of Commonwealth of Puerto Rico, case 17-03283-LTS, August 10, 2017, https://cases.primeclerk.com/~~
~~puertorico/Home-DownloadPDF?id1=NzAwNDI5&id2=0. Bettina Whyte was managing director and senior advisor at~~
~~Alvarez & Marsal, a New York financial advisory firm.~~
~~129 At this writing in February 2021, the Commonwealth T itle III docket contained over 15,800 filings—a rough~~
~~indicator of the complexity of the case.~~
~~130 John P. Cangialosi, Andrew S. Latto, and Robbie Berg, “T ropical Cyclone Report: Hurricane Irma,” National~~
~~Hurricane Center, AL112017, June 30, 2018, https://www.nhc.noaa.gov/data/tcr/AL112017_Irma.pdf; and Richard J.~~
~~Pasch, Andrew B. Penny, and Robbie Berg, “ T ropical Cyclone Report: Hurricane Maria,” National Hurricane Center,~~
~~February 14, 2019, AL152017, https://www.nhc.noaa.gov/data/tcr/AL152017_Maria.pdf.~~
~~131 Oversight Board, Commonwealth Revised Fiscal Plan, October 23, 2018, p. 17, https://drive.google.com/file/d/~~
~~17ca0ALe7vpYn0jEzTz3RfykpsFSM0ujK/view.~~
~~132 See CRS Report R46609,~~ ~~The Status of Puerto Rico’s Recovery and Ongoing Challenges Following Hurricanes~~
~~Irm a and María: FEMA, SBA, and HUD Assistance, coordinated by Elizabeth M. Webster.~~
~~133 Second Supplemental Verified Statement of the Senior COFINA Bondholders’ Coalition Pursuant to Federal Rule~~
~~of Bankruptcy Procedure 2019, case 17-03283-LTS, docket #1552, October 26, 2017. Also see Michelle Bocanegra,~~
~~“MVP: Quinn Emanuel’s Susheel Kirpalani,” Law360, November 30, 2018, https://www.law360.com/articles/~~
~~1094205/mvp-quinn-emanuel-s-susheel-kirpalani. In that interview, UCC lead counsel Luc Despins is described as a~~
~~mentor.~~
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~~After sel ing off about half of their COFINA junior bonds after Hurricane María hit, the coalition~~
~~increased its holdings of those bonds from $709 mil ion in October 2017 to $2.222 bil ion at the~~
~~end of October 2018, as shown in Figure 3.134 Over that interval—October 2017 to October~~
~~2018—the price of COFINA senior bonds rose from about 35% to over 80% of par, and junior~~
~~bonds rose from about 10% of par to about 50% of par.~~
~~On May 14, 2018, the COFINA Senior Bondholders Coalition proposed a framework to settle the~~
~~GO/COFINA dispute,135 which the Oversight Board reportedly rejected as offering the CPR no~~
~~“meaningful debt relief.”136 Further negotiations led to an agreement in principle, announced on~~
~~June 5, 2018, that would al ocate 53.65% of the Pledged Sales Tax Base Amount—set at 5.5% of~~
~~the 10.5% Sales & Use Tax—to COFINA.137 Judge Swain, according to media reports, viewed~~
~~the draft agreement favorably, as it could sidestep cal s to rule on the validity of COFINA’s legal~~
~~structure under the Puerto Rico Constitution.138~~
~~Under the proposed framework, existing COFINA bonds would be exchanged for new securities~~
~~designed to reduce debt service obligations over the next decade, but carrying stronger investor~~
~~protections. Certain COFINA creditors were to collect about $1.2 bil ion held in escrow.139 The~~
~~reduction in COFINA claims al owed the CPR government a greater share of sales and use tax~~
~~revenues, which, in principle, would benefit GO bondholders. Island taxpayers also appear to~~
~~have benefited from a reduction of certain tax rates enacted in December 2018.140~~

~~134 See the corresponding 7th verified statement, November 16, 2018, https://cases.primeclerk.com/puertorico/Home-~~
~~DownloadPDF?id1=ODk5ODcw&id2=0.~~
~~135 BusinessWire, “ COFINA Senior Bondholders Coalition Discloses Participation in Constructive Settlement~~
~~Discussions to Help Resolve Puerto Rico’s Debt Crisis,” May 14, 2018, https://www.businesswire.com/news/home/~~
~~20180514005558/en/.~~
~~136 Eva Lloréns Vélez, “GO-COFINA Bondholder Sides Head for Shootout,” Caribbean Business, July 13, 2018,~~
~~https://caribbeanbusiness.com/go-cofina-bondholder-sides-head-for-shootout/.~~
~~137 Michelle Kaske, “Puerto Rico’s Sales-T ax Bonds Soar on Optimism About Deal,” Bloomberg News, June 8, 2018,~~
~~https://www.bloomberg.com/news/articles/2018-06-08/puerto-rico-cofina-investors-get-half-sales-tax-in-proposed-~~
~~deal.~~
~~138 Eva Lloréns Vélez, “GO-COFINA Bondholder Sides Head for Shootout,” Caribbean Business, July 13, 2018.~~
~~139 Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA), COFINA Fiscal Plan, p. 5, September 7,~~
~~2018, http://www.aafaf.pr.gov/assets/cofina-fiscal-plan-090718.pdf.~~
~~140 Act 257-2018, enacted December 18, 2018. See Price Waterhouse Coopers, “Puerto Rico Adopts Significant~~
~~Amendments to its Income T ax Code,” January 2019, https://www.pwc.com/us/en/services/tax/library/insights/puerto-~~
~~rico-significant -amendments-to-income-tax-code.html.~~
~~Congressional Research Service~~

21

~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~Figure 3. COFINA Holdings of Senior COFINA Bondholders Coalition~~

Source: CRS calculations using Rule 2019 filings on the COFINA docket.
Notes: Baupost, headed by Seth Klarman, controls the investment vehicles named Decagon Holdings. See David
~~Dayen, “We Can Final y Identify One of the Largest Holders of Puerto Rican Debt,” Intercept, October 3, 2017,~~
~~https://theintercept.com/2017/10/03/we-can-final y-identify-one-of-the-largest-holders-of-puerto-rican-debt/.~~
~~The Oversight Board announced a deal with major COFINA creditors in August 2018.141 Once~~
~~the Puerto Rican government enacted conforming legislation,142 the Oversight Board certified a~~
~~revised COFINA fiscal plan.143 On October 18, 2018, the Board filed a disclosure statement that~~

~~141 FOMB, “Oversight Board Reaches Deal with COFINA Bondholders: Proposed COFINA Bondholders Agreement~~
~~to Save Puerto Rico over $17 Billion,” August 8, 2018, https://drive.google.com/file/d/~~
~~1xGS5aCydodT T GhhCtk3OhHLFD6I_Qnny/view.~~
~~142 Act 241 of 2018, November 15, 2018, http://www.lexjuris.com/lexlex/Leyes2018/lexl2018241a.htm.~~
~~143 FOMB, Unanimous Written Consent Certifying COFINA’s Fiscal Plan, October 19, 2018, https://drive.google.com/~~
~~Congressional Research Service~~

22

~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~detailed the proposed restructuring of COFINA debt.144 On November 27, 2018, the Title III court~~
~~approved145 a revised disclosure statement,146 clearing the way for a vote among classes of~~
~~COFINA bondholders for approval.147 The UCC, representing the interests of Commonwealth~~
~~creditors, conditional y approved the agreement in early November 2018 after having complained~~
~~about the settlement.148~~
~~Many junior COFINA bondholders contended the settlement was unfair. Some al eged that key~~
~~Senior COFINA Bondholders Coalition members had purchased enough junior bonds to attain a~~
~~decisive position in settlement negotiations, to the advantage of senior COFINA bondholders and~~
~~the detriment of junior COFINA bondholders.149 Smal investors also complained about $332~~
~~mil ion in consummation costs awarded to major investors involved in negotiations.150 Several~~
~~smal COFINA bondholder suits were dismissed by the Title III court. The U.S. Court of Appeals~~
~~for the First Circuit upheld those dismissals on February 8, 2021.151 In a separate case, that court~~
~~upheld on March 2, 2021, the dismissal of claims of Puerto Rico credit unions—cal ed~~
cooperativas—who contended they were pressured to buy COFINA junior bonds.152
~~Oversight Board, Title III Court Move to Wrap Up COFINA Restructuring~~
~~Arthur González, a member of the FOMB, argued that the proposed COFINA agreement was a~~
~~prudent compromise, which avoided litigation that could end with a judgement that~~
~~would either find that COFINA and its bondholders own the island’s sales tax revenues,~~
~~which would sharply reduce the funds available for other constituencies, or that the~~
~~Commonwealth has the right to claw them back. A loss for the Commonwealth would be~~
~~a particularly devastating setback, costing the local government billions of dollars in~~
~~reduced debt and recouped revenue over the coming decades.153~~

~~file/d/1KL0LsMGXtOaNPJ8YPKMpJCCs37uKZT 9C/view.~~
~~144 FOMB,~~ ~~Disclosure Statement for the Title III Plan of Adjustment of the Debts of Puerto Rico Sales Tax Financing~~
~~Corporation, Case No. 17-BK-3284 (LT S), October 18, 2018, https://cases.primeclerk.com/puertorico/Home-~~
~~DownloadPDF?id1=ODk3NzAy&id2=0. Bankruptcy Code §1125 incorporated into PROMESA (§301(a)) required the~~
~~Oversight Board to file a disclosure statement ahead of voting by creditors to accept or reject the plan.~~
~~145 In re CPR and In re COFINA, Order Approving Disclosure Statement, https://cases.primeclerk.com/puertorico/~~
~~Home-DownloadPDF?id1=OT AwMT E5&id2=0.~~
~~146 FOMB,~~ ~~Disclosure Statement for the Amended Title III Plan of Adjustment of the Debts of Puerto Rico Sales Tax~~
~~Financing Corporation, Case No. 17-BK-3284 (LT S), November 16, 2018, https://cases.primeclerk.com/puertorico/~~
~~Home-DownloadPDF?id1=ODk5NzQw&id2=0. In re CPR and In re COFINA, Disclosure Statement for the Second~~
~~Amended T itle III Plan of Adjustment, November 26, 2018, https://cases.primeclerk.com/puertorico/Home-~~
~~DownloadPDF?id1=OT AwMDAw&id2=0.~~
~~147 A memorandum, which congressional clients may request, describes the structure of the new COFINA bond issue.~~
~~148 Robert Slavin, “ COFINA Deal T akes Step Forward with Proposed Settlement,” Bond Buyer, November 6, 2018.~~
~~149 Eva Lloréns Vélez, “‘Bonistas’ T out COFINA Deal Impact on Local Capital,” Caribbean Business, October 22,~~
~~2018, https://caribbeanbusiness.com/bonistas-tout-cofina-deal-impact-on-local-capital/.~~
~~150 A list of the Consummation Cost Parties is presented as T erm Sheet Exhibit B (p. 367) of the second amended~~
~~disclosure statement of November 26, 2018. T he Consummation Cost provision is at pp. 362 -364.~~
~~151 For a summary of a hearing on four related appeals contesting the COFINA settlement, see Robert Slavin,~~
~~“COFINA $17.6B Deal Attacked in Appeals Court,” Bond Buyer, August 3, 2020. One of the judges who heard~~
~~arguments in August 2020, Juan R. T orruella, died in October 2020. Pinto-Lugo et al. v. CPR, Judgem ent and Opinion,~~
~~case 19-1181, U.S. Court of Appeals for the 1st Circuit, February 8, 2021~~ 41 Andrew Bary, “Troubling Winds: Puerto Rico’s Huge Debt Could Overwhelm Attempts to Revive its Economy,” Barron’s, August 26, 2013. 42 Mark Tannenbaum and Martin Z. Braun, “Puerto Rico GDB Hires Millstein Unit as Financial Adviser,” Bloomberg, March 6, 2014, http://www.bloomberg.com/news/articles/2014-03-05/puerto-rico-gdb-hires-millstein-affiliate-as- financial-adviser. Also see Emily Glazer and Mike Cherney, “Puerto Rico Finance Arm Hires Restructuring Lawyers: Government Development Bank for Puerto Rico Hires Cleary Gottlieb Steen & Hamilton,” Wall Street Journal, April 7, 2014. 43 GDB, Commonwealth Quarterly Financial Report, July 17, 2014, pp. 41-42, http://www.gdb-pur.com/documents/CommonwealthQuarterlyReport71714.pdf. GNP, which measures the value of output created within a given jurisdiction, is considered a more accurate indicator of Puerto Rico’s level of economic activity than gross domestic product (GDP), which in Puerto Rico is strongly influenced by transactions of multinational corporations that often have a tenuous connection to the island’s economy. 44 Commonwealth of Puerto Rico, Consolidated Annual Financial Report for FY2013, note 22, pp. 230-231, http://www.hacienda.gobierno.pr/downloads/pdf/cafr/FINANCIAL_REPORT_2013.pdf. 45 Ley para el Cumplimiento con las Deudas y para la Recuperación de las Corporaciones Públicas de Puerto Rico (Ley 71 de 2014; Act 71-2014; Law Pursuant to the Debts and for the Recovery of the Public Corporations of Puerto Rico). The law is also called the “Recovery Act” or the “Local Bankruptcy Law” (“Ley de Quiebra Criolla”). 46 See Moody’s Investor’s Service, “Puerto Rico’s Debt Restructuring Law Raises Default Risk for Public Corporations and the Commonwealth,” July 3, 2013. Also see Kobre & Kim LLP, Final Investigative Report, August 20, 2018, https://drive.google.com/file/d/19-lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, pp. 189-190; and CRS Report R44095, Puerto Rico’s Current Fiscal Challenges, by D. Andrew Austin, Puerto Rico’s Current Fiscal Challenges, by D. Andrew Austin. 47 Joel Cintrón Arbasetti, “275 Investment Firms Jumped on Puerto Rico’s Junk Debt,” Centro de Periodismo Investigativo, August 31, 2016, https://periodismoinvestigativo.com/2016/08/275-investment-firms-jumped-on-puerto-ricos-junk-debt/. 48 “Fitch Cuts Puerto Rico’s Debt to Junk,” New York Times, February 11, 2014, https://dealbook.nytimes.com/2014/02/11/fitch-cuts-puerto-ricos-debt-to-junk/. Downgrades were triggered by warnings that the Government Development Bank faced liquidity challenges. 49 The Series A bonds—CPR’s sole bond issuance in 2014—offered at 93¢ on the dollar, carry an 8% coupon rate, implying an initial yield of 8.6%. The average yield for Bond Buyer 20-Bond GO Index for 2014 was 4.25%. See WM Financial Strategies, “Rates Over Time,” November 2020, http://www.munibondadvisor.com/market.htm. The bond’s official statement warned the “Commonwealth may be unable to honor its obligation to pay debt service on the Bonds,” GDB, 2014A GO Bond Official Statement, March 11, 2014, https://web.archive.org/web/20160317092340/http://www.gdbpr.com/investors_resources/documents/CommonwealthPRGO2014SeriesA-FinalOS.PDF. Congressional Research Service 8 Puerto Rico’s Public Debts: Accumulation and Restructuring significant investor protection. Moreover, the Puerto Rico Constitution sets debt service as a top priority, before other public outlays. About $900 million of the bond proceeds went to pay off bank loans, including to banks involved in underwriting the issue.50 SEC staff reportedly recommended actions against bankers involved in the deal, including former GDB head Jorge Irizarry, who later led a coalition said to represent local junior COFINA bondholders.51 The SEC declined to pursue those charges.52 Investment funds Paulson & Company, Och-Ziff Capital,53 Fir Tree Partners, Perry Capital, and Brigade Capital reportedly each bought more than $100 million of the issue.54 After the 2014 GO issuance, hedge funds expanded their involvement in Puerto Rico, both in purchases of bonds as well as contact with officials and policymakers. The ratings agency Fitch, according to reports, found that some 60 hedge funds held about $16 billion of Puerto Rico’s public debt, about 22% of the total amount, by fall 2014.55 In addition, the investment bank Goldman Sachs’s holdings of Puerto Rican debt increased to a reported $1.3 billion in 2014.56 Federal Courts Strike Down Local Bankruptcy Law The Puerto Rican government lost access to Chapter 9 of the U.S. Bankruptcy Code, which governs the adjustment of municipal debts, in 1984.57 Lacking that access and with major public corporations facing severe liquidity challenges, island policymakers sought to create a path to 50 Laura Sullivan, “How Puerto Rico’s Debt Created A Perfect Storm Before The Storm,” NPR/Frontline, May 2, 2018, https://www.npr.org/2018/05/02/607032585/how-puerto-ricos-debt-created-a-perfect-storm-before-the-storm. 51 Martin Z. Braun, “SEC Probes Barclays, Morgan Stanley Bankers Over Puerto Rico,” Bloomberg, June 28, 2017, https://www.bloomberg.com/news/articles/2017-06-28/sec-probes-barclays-morgan-stanley-bankers-on-puerto-rico-bonds. Also see Robert Slavin, “Morgan Stanley Hires Former GDB President to Attract Puerto Rico Business,” Bond Buyer, April 30, 2013. Irizarry later headed the Bonistas del Patio group, which played a role in the COFINA restructuring. 52 Carlos A. Otero, “Concluye sin Acusaciones Pesquisa de la SEC,” [SEC Investigation Concludes without Charges], El Vocero, April 9, 2018, p. 5, https://issuu.com/vocero.com/docs/v04092018__1_/4. 53 Och-Ziff changed its name to Sculptor Capital in 2019, two weeks before a deferred prosecution agreement with the U.S. Department of Justice related to trade in conflict diamonds and minerals expired. See Sculptor Capital, “Och-Ziff Capital Management Changes Name to Sculptor Capital Management,” press release, September 12, 2019, https://www.globenewswire.com/news-release/2019/09/12/1914643/0/en/Och-Ziff-Capital-Management-Changes-Name-to-Sculptor-Capital-Management.html. Also see U.S. v. Och-Ziff, Deferred Prosecution Agreement, September 26, 2016, https://www.justice.gov/criminal-fraud/file/900261/download. 54 Joel Cintrón Arbasetti, “Vulture Funds have Puerto Rico Cornered,” Center for Investigative Journalism, April 9, 2015, https://periodismoinvestigativo.com/2015/04/vulture-funds-have-puerto-rico-cornered/. 55 Michael Corkery, “Let Us Help You, Hedge Funds Tell Puerto Rico,” New York Times, September 12, 2014, https://dealbook.nytimes.com/2014/09/12/puerto-rico-finds-it-has-new-friends-in-hedge-funds/. Also see Joel Cintrón Arbasetti and Carla Minet, “Out in the Open, Hedge Funds in Puerto Rico,” Center for Investigative Journalism, July 14, 2015, https://periodismoinvestigativo.com/2015/07/out-in-the-open-hedge-funds-in-puerto-rico/. 56 Brian Chappatta, “Puerto Rico’s 10% Yields Prove Too Tempting for Goldman to Skip,” Bloomberg Business, May 26, 2015. 57 P.L. 98-353 amended the Bankruptcy Code to exclude Puerto Rico from the definition of “State” for “the purpose of defining who may be a debtor under chapter 9,” which removed Puerto Rico’s access to Chapter 9. See Jon Greenberg, “Mystery: Strom Thurmond, Puerto Rico and Bankruptcy Protection,” PolitiFact, April 27, 2016, https://www.politifact.com/factchecks/2016/apr/27/john-oliver/mystery-strom-thurmond-puerto-rico-and-bankruptcy-/. The late Judge Torruella, an expert on U.S.-Puerto Rico relations, stated in a concurrence that “there is no legislative record on which to rely for determining Congress’s reasons behind the 1984 Amendments. A tracing of its travels through the halls of Congress sheds less light than a piece of coal on a moonless night regarding the reason for its enactment.” Franklin Cal. Tax-Free Tr. v. Puerto Rico, 805 F.3d 322, 349 (1st Cir. 2015) (Torruella, J., concurring in the judgment), aff’d, Puerto Rico v. Franklin Cal. Tax-Free Tr., 136 S. Ct. 1938 (2016). Congressional Research Service 9 Puerto Rico’s Public Debts: Accumulation and Restructuring restructuring debts through local laws. In particular, the deterioration of PREPA’s finances and operations became evident in spring 2014.58 In August 2014, PREPA, unable to afford fuel, signed a restructuring support agreement (RSA) with its creditors, which included appointment of an outside chief restructuring officer.59 In June 2014, Puerto Rico enacted a local bankruptcy law, which heightened concerns of default risks.60 The hedge fund Blue Mountain Capital Management, along with the Oppenheimer and Franklin mutual fund groups, challenged the law.61 Other hedge funds reportedly supported the law, which would enhance CPR’s ability to pay GO debt by allowing cramdowns of public corporations’ debt.62 The Supreme Court struck down the local bankruptcy law,63 holding that, although the Bankruptcy Code prevents municipalities in Puerto Rico from seeking relief under Chapter 9, the code nonetheless preempted Puerto Rico’s Recovery Act, and thus barred the CPR from enacting its own municipal bankruptcy scheme to restructure debt.64 Governor García Padilla Calls Debt “Unpayable,” Declares Fiscal Emergency Then-Governor García Padilla called Puerto Rico’s public debts “unpayable” at the end of June 2015.65 In the following year, the governor took a series of actions to conserve the government’s liquidity in the face of mounting fiscal pressures. At the beginning of August 2015, three small public bond issues were in default.66 At the end of November 2015, Governor Padilla signed an executive order authorizing a clawback of balances and revenues from transportation and infrastructure entities.67 In April 2016, he signed into law Act 21-2016, which declared that a debt 58 In June 2014, Municipal Market Analytics (MMA) reported that “PREPA’s reality is that it is operating deep in the red, with antiquated technology, high costs and declining sales.” See Testimony of Robert Donahue, MMA Managing Director, in U.S. Congress, House Committee on the Judiciary, Subcommittee on Regulatory Reform, Commercial And Antitrust Law, H.R. 870, 114th Cong., 1st sess., February 26, 2015, p. 28, https://www.jonesday.com/files/upload/robert-donahue-testimony.pdf. 59 For details, see CRS Report R44095, Puerto Rico’s Current Fiscal Challenges, by D. Andrew Austin. 60 Ley para el Cumplimiento con las Deudas y para la Recuperación de las Corporaciones Públicas de Puerto Rico (Ley 71 de 2014; Act 71; Law Pursuant to the Debts and for the Recovery of the Public Corporations of Puerto Rico). The law was also called the “Recovery Act” or the “Local Bankruptcy Law” (“Ley de Quiebra Criolla”). See also Moody’s Investor’s Service, “Puerto Rico’s Debt Restructuring Law Raises Default Risk for Public Corporations and the Commonwealth,” July 3, 2013. 61 Carlos F. Ugalde, “Puerto Rico’s Municipal Debt Crisis: A Two-Front Battle?” Fordham Urban Law Journal, March 17, 2015, https://news.law.fordham.edu/fulj/2015/03/17/puerto-ricos-municipal-debt-crisis-a-two-front-battle/. 62 Michael Cembalest, “Passage to Puerto Rico,” J.P. Morgan, Eye on the Market, July 11, 2016, https://www.jpmorgan.com/directdoc/passagetopuertorico.pdf. A cramdown is a reduction or restructuring of debts through a legal procedure that supersedes prior contractual requirements. 63 Puerto Rico v. Franklin Cal. Tax-Free Tr., 136 S. Ct. 1938 (2016). Also see Stephen J. Lubben, “Puerto Rico and the Bankruptcy Clause,” American Bankruptcy Law Journal, vol. 88, no. 4 (fall 2014), pp. 553-578 (at p. 573). 64 See 136 S. Ct. at 1942. Chapter 9 of the Bankruptcy Code defines a municipality as a “political subdivision or public agency or instrumentality of a State.” Cf. 11 U.S.C. §101(40). The Bankruptcy Code thus covers a wider set of public entities than the term municipalities usually connotes. In Puerto Rico, municipalities (municipios) resemble county governments on the mainland. 65 Mensaje del Gobernador Alejandro García Padilla Sobre Situación Fiscal de Puerto Rico (Governor Alejandro García Padilla’s Message on the Fiscal Situation of Puerto Rico), June 29, 2015, https://www.elnuevodia.com/noticias/politica/nota/mensajedelgobernadoralejandrogarciapadillasobresituacionfiscaldepuertorico-2066574/. 66 Puerto Rico Standard & Poors, “Rating on Three Puerto Rico PFC Series Lowered to ‘D’ On Non-Payment,” RatingsDirect, August 3, 2015, http://www.gdb-pur.com/investors_resources/documents/SP-RatingsDirectNews-Aug-03-2015.pdf. How clawback funds were used is unclear. See Luis J. Valentín Ortiz, “Light Shed on Clawed-Back Funds,” Caribbean Business, August 24, 2016, https://caribbeanbusiness.com/light-shed-on-clawed-back-funds/. 67 Gov. Alejandro García Padilla, Executive Order 2015-46, November 30, 2015, https://estado.pr.gov/es/ordenes- Congressional Research Service 10 Puerto Rico’s Public Debts: Accumulation and Restructuring service moratorium could be invoked to preserve funding for essential public services.68 As Puerto Rico’s defaults widened, Congress considered measures to address the island’s fiscal crisis, which culminated in PROMESA’s enactment. On June 29, 2016—two days before a $780 million GO debt service payment was due—Governor Padilla suspended payments on GO and Commonwealth-guaranteed bonds, leading to the first defaults on CPR debt.69 The following day, June 30, 2016, PROMESA was signed into law by President Obama to address Puerto Rico’s debts and finances. Before describing provisions of PROMESA, the next section analyzes the structure of Puerto Rico’s debt stack. Predefault Structure of Puerto Rico’s Public Debts Puerto Rico’s fiscal crisis and its accumulations of debt are intertwined with the structure of its public sector. This section surveys Puerto Rico’s public debts and briefly discusses how they were accumulated. The Puerto Rican government includes a central government—the Commonwealth of Puerto Rico (CPR)—as well as some 50 public corporations.70 These public corporations have a wide range of responsibilities, including providing electricity, water and sewer service, social services, health care, and maintenance of ports and parks. The island’s public debt, issued by 18 distinct public entities, presents an unusually complex debt structure. Transfers and cross-subsidies among different public agencies and corporations, often routed through the former Government Development Bank, added to that complexity.71 Government Development Bank as Fiscal Agent and Financial Advisor The GDB—the CPR’s former fiscal agent and financial advisor to each governor’s administration—had a central role in Puerto Rico’s debt crisis. In postwar decades, it supported the island’s industrialization strategy and served a mix of public and private clients. A GDB head in 2015 described its role as “really a combination of things that the Treasury, the New York Fed and a development bank like the Inter-American Development Bank do.”72 In particular, the GDB controlled debt issuance and negotiated with investment banks. The GDB defaulted on bond ejecutivas/. 68 Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, Act 21-2016, http://www.lexjuris.com/lexlex/Leyes2016/lexl2016021.htm. 69 Gov. Alejandro García Padilla, Executive Order 2016-30, June 29, 2016, https://www.estado.pr.gov/es/ordenes-ejecutivas/. For the July 1, 2016, GO debt service payment, see Act 21-2016 at p. 53. Some other sources cite other amounts for that payment. 70 Oficina de Gerencia y Presupuesto (Puerto Rico Office of Management and Budget; OGP), Organigrama (Organization Chart), March 2, 2017, http://ogp.pr.gov/SobreOGP/Pages/organigrama.aspx. That version depicted 128 government entities. Former Governor Ricardo Rosselló Nevares (2017-2019) consolidated some smaller public corporations into central government departments. 71 For example, a disclosure for the March 2014 NY Law GO bond issue stated (p. II-74) “GDB, however, has provided financing in the past and may continue to provide financing to governmental entities that do not have sufficient independent resources to cover their operating expenses, to the extent permitted by law.” CPR, 2014A GO Bond Official Statement, March 14, 2020, https://emma.msrb.org/ER892398-ER588507-ER990528.pdf. 72 Mary Williams Walsh and Michael Corkery, “Behind Puerto Rico’s Woes, a Broadly Powerful Development Bank,” New York Times, November 29, 2015; and Arturo C. Porzecanski, “The Government Development Bank: At the Heart of Puerto Rico’s Financial Crisis,” American University working paper, September 18, 2014, http://auapps.american.edu/aporzeca/www/The%20GDB%20at%20the%20Heart%20of%20Puerto%20Ricos%20Financial%20Crisis.pdf. Congressional Research Service 11 link to page 18 link to page 55 link to page 55 Puerto Rico’s Public Debts: Accumulation and Restructuring payments in May 2016. In 2017, the newly formed Fiscal Agency and Financial Advisory Authority (FAFAA) assumed most of GDB’s functions.73 Categories of Public Debt Restructuring Puerto Rico’s finances has involved complex disputes among bondholders invested in different types of Puerto Rico’s public debt. This section outlines the structure of the island’s public debts. Since Puerto Rico lost access to credit markets in late 2014, its current debt structure has been largely unchanged, aside from the runoff of short-term notes, the 2018 wind-down of the GDB, and the 2019 restructuring of sales-tax-backed COFINA bonds (COFINA—an acronym for the Corporación del Fondo de Interés Apremiante—is also known as the Puerto Rico Sales Tax Financing Corporation). Figure 2 and Table A-1 show debt levels as of the end of July 2016. Unfunded obligations of Puerto Rico’s pension systems, which were estimated at $49 billion as of June 2015, are not included.74 Puerto Rico’s public debt, after adjustments to avoid double-counting, totaled $68.7 billion at the end of July 2016.75 These debts can be divided by the source of funds used to repay them,76 namely 1. the Commonwealth’s General Fund; 2. the sales & use tax or other specific revenue sources; 3. public corporations’ revenues; 4. other debts, including local governments (municipios) and nonrecourse debt.77 By July 2016, the category of debt repaid through the General Fund included $12.7 billion in GO debt backed by the good faith, credit, and taxing power of the Commonwealth, as well as $4.2 billion in Public Building Authority debt, most of which carried a CPR guarantee. Another $25.5 billion of Puerto Rico’s public sector debt was payable from selected tax receipts, including $17.3 billion in COFINA bonds. An additional $11.5 billion was payable through Commonwealth appropriations. Outstanding bonds for the island’s largest public corporations, PREPA ($9.0 billion) and PRASA ($4.6 billion), are mostly repaid through utility charges. 73 Enabling Act of the Fiscal Agency and Financial Advisory Authority, Act 2 of 2017, January 18, 2017, https://www.aafaf.pr.gov/wp-content/uploads/a-002-2017-1.pdf. 74 GDB, Commonwealth Statement, December 18, 2016, p. 222, https://web.archive.org/web/20170101045953/http://bgfpr.com/documents/CommonwealthofPuertoRicoFinancialInfoFY201612-18-16.pdf. 75 Ibid. Also see Table A-1. 76 For a detailed discussion of different categories of public debts, see GDB, Commonwealth Statement, December 18, 2016, pp. 172-208. 77 The Children’s Fund, which comprises most of the nonrecourse debt, stems from settlements of 1990s tobacco suits. Archived CRS Report RL30058, Tobacco Master Settlement Agreement (1998): Overview, Implementation by States, and Congressional Issues, by C. Stephen Redhead, is available to congressional clients upon request. Congressional Research Service 12 Figure 2. Puerto Rico’s Public Debt as of July 31, 2016, in $Billions Source: CRS calculations based on Commonwealth Statement, December 18, 2016, https://web.archive.org/web/20170101045953/http://bgfpr.com/documents/CommonwealthofPuertoRicoFinancialInfoFY201612-18-16.pdf. Notes: Some items may not sum to totals due to rounding. This figure excludes debt of the Government Development Bank to minimize double counting. See source document for other important notes and caveats. CRS-13 Puerto Rico’s Public Debts: Accumulation and Restructuring Public Debt and the Puerto Rico Constitution The Puerto Rican Constitution’s provisions related to budgets and debt have played a central role in the process of restructuring the island’s public debts.78 Puerto Rico treated public corporations as legally separate from the island’s central government,79 although in practice governors largely have controlled them indirectly via appointments of those corporations’ boards.80 Debts of most public corporations were also considered as separate from debts of the central (CPR) government. Five key fiscal policy clauses in the Puerto Rico Constitution are  a balanced budget requirement that appropriations (asignaciones aprobadas) not exceed available resources (los recursos disponibles) (Article VI, Section 8);  a priority for payment of interest and principal for securities backed by the “full faith and credit” of the Puerto Rico government in the case of a budgetary shortfall (Article VI, Section 8);  a “clawback” provision, mandating the reapplication of revenues to debt service of full faith and credit pledges (Article VI Section 2);  a prohibition on issuance of new GO debt if average debt service costs over the two preceding fiscal years equaled or exceeded 15% of the average of total revenues for those two years (Article VI Section 2);81  a 30-year limit on GO bond maturities, except for housing bonds, which were permitted maturities of up to 40 years (Article VI, Section 2). The stringency of those provisions, however, was loosened in several ways. A 1974 Puerto Rico Attorney General’s opinion held that bond proceeds counted as “available resources,” thus relaxing the balanced budget requirement.82 The 15% limit and the 30-year maturity limit were considered to apply only to central government GO debt, not to so-called “extraconstitutional” debt of public corporations and COFINA. The GDB, by serving as a conduit for transferring resources between the central government and other public entities, also weakened the effective distinction between “constitutional” and “extraconstitutional” debt.83 Moreover, some have 78 The English version of the Puerto Rico Constitution is available at https://web.archive.org/web/20130302224519/http://www.oslpr.org/english/PDF/The%20Constitution%20of%20the%20Commonwealth%20of%20Puerto%20Rico.pdf. 79 For instance, the law (Act 83 of 1941; 22 L.P.R.A. §193) creating PREPA’s predecessor states that “debts, obligations, contracts, bonds, notes, promissory notes, receipts, expenses, accounts, funds, companies and property of the Authority, its officers, agents or employees, should be understood to be of the said governmentally controlled corporation and not of the central government.” 80 Geoff G. Burrows, “The New Deal in Puerto Rico: Public Works, Public Health, and the Puerto Rico Reconstruction Administration, 1935-1955,” City University of New York (CUNY) dissertation, 2014, https://academicworks.cuny.edu/gc_etds/315. 81 This limit was interpreted as “15% of the average annual revenues raised under the provisions of Commonwealth legislation and deposited into the treasury (… ‘internal revenues’) in the two fiscal years preceding the fiscal year of such proposed issuance. Internal revenues consist principally of income taxes, sales and use taxes (other than those assigned to COFINA) and excise taxes.” GDB, Commonwealth Statement, December 18, 2016, p. 177. 82 P.R. Op. Sec. Just. 1974-15, 1974 WL 326062 (P.R. Atty. Gen.). Also see Carlos Colón De Armas, “La Constitución de Puerto Rico y Su Requisito de un Presupuesto Balanceado,” [Puerto Rico’s Constitution and its Balanced Budget Requirement], Law Review of the University of Puerto Rico, vol. 85, no. 3 (2016), pp. 819-832; and Sergio M. Marxuach, “The Endgame: An Analysis of Puerto Rico’s Debt Structure and the Arguments in Favor of Chapter 9,” Center for a New Economy working paper, November 30, 2015, http://bit.ly/2aBM7X3. 83 Arturo C. Porzecanski, “The Government Development Bank: At the Heart of Puerto Rico’s Financial Crisis,” Congressional Research Service 14 link to page 22 Puerto Rico’s Public Debts: Accumulation and Restructuring contested whether some post-2012 debt issues conformed to the 15% limit, as well as the reach of clawback measures used to bolster resources for payment of GO debt. Interpretations of those constitutional limits have shaped much of the island’s public finance policy as well as PROMESA Title III litigation, which later sections describe.84 PROMESA Enacted in 2016 to Address the Crisis PROMESA (P.L. 114-187), as noted above, established two debt adjustment processes and a Financial Oversight and Management Board for Puerto Rico, among other provisions.85 Title II of PROMESA endowed the FOMB with wide authorities, while the governor and legislature of Puerto Rico retained substantial control over public priorities, within the constraints of Board-certified fiscal plans and other PROMESA provisions. Oversight Board Appointments and Organization The Oversight Board plays a central role in the restructuring process. At the end of August 2016, President Obama appointed six members from nomination lists compiled by congressional leaders and a seventh of his own choosing.86 The Puerto Rico governor was empowered to appoint a nonvoting representative to the Board. The Board chose José B. Carrión, an island insurance broker, as chair.87 Litigation questioning the Board’s compliance with the U.S. Constitution’s Appointments Clause delayed the renomination or replacement of the original members, whose three-year terms expired in August 2019. The Supreme Court rejected those challenges in June 2020, clearing the way for new nominations and appointments.88 The Oversight Board chooses which instrumentalities will be “covered.”89 The Board can require the CPR government and covered instrumentalities to submit fiscal plans and budgets, which are subject to Board approval. In September 2016, the Oversight Board listed the CPR government as a covered territory and 62 public corporations and other entities as covered instrumentalities.90 The Board also represents covered entities in debt restructuring processes set up by PROMESA. American University working paper, September 18, 2014, http://auapps.american.edu/aporzeca/www/The%20GDB%20at%20the%20Heart%20of%20Puerto%20Ricos%20Financial%20Crisis.pdf. 84 For instance, see “Restructuring COFINA and GO Bonds.” 85 See CRS Report R44532, The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA; H.R. 5278, S. 2328), coordinated by D. Andrew Austin. 86 White House, “President Obama Announces the Appointment of Seven Individuals to the Financial Oversight and Management Board for Puerto Rico,” press release, August 31, 2016, https://obamawhitehouse.archives.gov/the-press-office/2016/08/31/president-obama-announces-appointment-seven-individuals-financial. 87 Mr. Carrión’s relatives have served in various leadership roles in Banco Popular, the island’s largest bank. Guillermo A. Baralt, Tradition into the Future: The First Century of the Banco Popular de Puerto Rico: 1893-1993 (San Juan: Banco Popular, 1993). José Carrión was brother-in-law of Pedro Pierluisi Urrutia, Resident Commissioner at the time. 88 Financial Oversight and Management Bd. for Puerto Rico v. Aurelius Investment, LLC, 140 S.Ct. 1649 (2020), https://www.supremecourt.gov/opinions/19pdf/18-1334_8m58.pdf. 89 PROMESA §101(d)(1). For context, see Jesse Barron, “Isle of Debt,” New York Times Magazine, December 1, 2019, p. 42. 90 Oversight Board, “Covered Entities List,” November 18, 2016, https://drive.google.com/file/d/1D37UiofV0T5s1Q4J54vs3xX_ArGF9532/view. Congressional Research Service 15 Puerto Rico’s Public Debts: Accumulation and Restructuring PROMESA Established Two Paths to Restructure Debt PROMESA’s Title III establishes a debt restructuring process that draws on Chapters 9 and 11 of the U.S. Bankruptcy Code.91 Title VI establishes a debt restructuring process for voluntary collective action agreements, similar to procedures used in some sovereign debt negotiations. Chief Justice John Roberts selected U.S. District Court Judge Laura Taylor Swain to oversee PROMESA Title III processes in proceedings in San Juan and New York. Chapter 9 of the U.S. Bankruptcy Code92 and Debt Restructuring under PROMESA Title III Congress first enacted a municipal bankruptcy law during the Great Depression of the 1930s to allow local governments to reorganize their debts under the supervision of a federal court.93 State governments cannot file for bankruptcy, but may allow—or bar—their municipalities to seek protection from creditors under provisions of Chapter 9 of the Bankruptcy Code. The code defines “municipality” as a “political subdivision or public agency or instrumentality of a State,” which includes not only towns and cities, but also school districts, utility districts, and public authorities responsible for roads, bridges, water, sewers, and other publicly provided services.94 A municipality may only receive Chapter 9 protections if several conditions are met: its state government approves; it is insolvent; it wishes to implement a “plan of adjustment”; and it negotiates with creditors in good faith or demonstrates such negotiations are impracticable.95 A municipality’s petition stays creditors from taking action to col ect debts, within certain limits and subject to certain challenges. A bankruptcy court, however, cannot control a municipality’s regular operations, with some narrow exceptions.96 A municipality’s final plan of adjustment, typically the result of negotiations with creditor groups, is subject to a federal judge’s confirmation. The PROMESA Title III process largely fol ows procedures of Chapter 9 of the Bankruptcy Code, although it adds some requirements and omits others.97 First, Title III uses the terms “covered territory”—meaning Puerto Rico—and “covered territorial instrumentalities” rather than “municipality.” Second, Title III, unlike Chapter 9, does not require insolvency as a prerequisite to seeking protection from creditors. Other differences are that the Oversight Board decides which public entities are covered territorial instrumentalities, chooses whether they can seek debt relief, and represents those entities through the Title III process.98 PROMESA requires formulation and certification of Fiscal Plans for covered entities,99 which are necessarily integrated with debt restructuring plans. Filing a Title III relief petition triggers an initial stay of litigation, although creditors may challenge the petition afterward.100 91 See the appendix of CRS Report R44532, The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA; H.R. 5278, S. 2328), coordinated by D. Andrew Austin, for a listing of Bankruptcy Code provisions incorporated into Title III. 92 See CRS Report R45137, Bankruptcy Basics: A Primer, by Kevin M. Lewis; and CRS Legal Sidebar LSB10116, When the City Goes Broke: Pensions, Retirees, and Municipal Bankruptcies, by Kevin M. Lewis. 93 U.S. Courts, “Chapter 9—Bankruptcy Basics,” https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-9-bankruptcy-basics. Also see Michael W. McConnell and Randal C. Picker, “When Cities Go Broke: a Conceptual Introduction to Municipal Bankruptcy,” University of Chicago Law Review, vol. 60(2), spring 1993, pp. 425-495. 94 11 U.S.C. §101(40). 95 That condition also may be met by reaching agreement with creditors holding a majority of claims in each affected class, or if the municipality reasonably believes a creditor may try to obtain a preferential transfer. 11 U.S.C. §109(c)(5). 96 11 U.S.C. §904. 97 For a list of provisions referenced in PROMESA Title III, see Appendix B of CRS Report R44532, The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA; H.R. 5278, S. 2328), coordinated by D. Andrew Austin. 98 PROMESA §§206, 304, 312, 315; 48 U.S.C. §§2146, 2164, 2172, 2175. 99 PROMESA §201; 48 U.S.C. §2141. 100 PROMESA §304; 48 U.S.C. §2164. Congressional Research Service 16 Puerto Rico’s Public Debts: Accumulation and Restructuring Major Title III cases have involved multiple issuers of debt because those entities’ fiscal relations were entwined, which has complicated negotiations with creditor representatives. The Oversight Board has, with the approval of the Title III court, used its authority to appoint agents to represent interests of bondholders and other creditors.101 The court also appointed a mediation team headed by Judge Barbara Houser to oversee negotiations.102 A plan support agreement (PSA) outlines terms of negotiations and may be modified as additional parties sign on or as terms shift. The Oversight Board is charged with proposing a plan of adjustment to implement negotiated terms of the restructuring. That plan may involve proposals to modify Puerto Rican laws, regulations, and fiscal plans. The Puerto Rican government and legislature retain broad powers to control public operations aside from other PROMESA strictures.103 Obtaining legislative or regulatory changes consistent with the plan of adjustment is one prerequisite of court confirmation of the plan.104 The Oversight Board, as agent of the debtor, must file a disclosure statement for a plan of adjustment to inform creditors.105 If the Title III court holds that the disclosure statement is adequate, creditors vote on the plan of adjustment. Creditors holding the same or similar types of debt or claims are divided into classes, as specified in the plan of adjustment. Creditors within classes whose claims would be impaired by the plan vote to approve or reject it. Approval of at least one class of impaired creditors is required. Other requirements for confirmation by the Title III court include that the plan was proposed in good faith, that it is feasible and in the best interests of creditors, and that it conforms to a Board-certified fiscal plan.106 After approval, creditors are compensated according to the plan, in cash, in new bonds, or in other ways, equal to payment in ful , nothing, or some intermediate amount. Restructuring COFINA and GO Bonds Disputes over the legal and constitutional foundation for tax-backed bonds and for certain other bonds have played a central role in Puerto Rico’s debt restructuring, even before PROMESA’s enactment. In particular, controversies over the relative priority of GO debt claims and claims of sales-and-use-tax-backed COFINA debt split investor groups. Some suspected that issuing COFINA bonds sidestepped a limitation on debt issuance in the Puerto Rico Constitution, an accusation denied by others.107 COFINA bonds were sold as “extraconstitutional” debt, meaning that bond proceeds and tax revenues supporting debt service were not to be considered as “available resources” to the CPR. Bond documents asserted that COFINA proceeds were therefore protected from “clawback,” that is, the invocation of a provision of the Puerto Rican Constitution prioritizing payment of GO debt service.108 While the Puerto Rican government obtained opinions from mainland law firms and the Puerto Rican Attorney General that COFINA funds would not be subject to clawback, at least one mainland 101 PROMESA §104; 48 U.S.C. §2124. Also see Stipulation and Order Approving Procedure to Resolve Commonwealth-COFINA Dispute, In re CPR, case 17-03283-LTS, August 10, 2017, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NzAwNDI5&id2=0. 102 In re: CPR, case 17-03283-LTS, Order Appointing Mediation Team, June 23, 2017, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NjU3Njgy&id2=0. The team was appointed under terms of 11 U.S.C. §105. Barbara Houser had been chief bankruptcy judge of the U.S. Bankruptcy Court for the Northern District of Texas. 103 PROMESA §§303, 314; 48 U.S.C. §§2163, 2174. 104 PROMESA §314; 48 U.S.C. §2174(b)(5). 105 PROMESA §§301, 310; 11 U.S.C. §1125. 106 PROMESA §314; 48 U.S.C. §2174(b); 11 U.S.C. §1129. 107 William Isaac, “Banks Have Huge Stake in Outcome of Puerto Rico Crisis,” American Banker, November 5, 2015, https://www.americanbanker.com/opinion/banks-have-huge-stake-in-outcome-of-puerto-rico-crisis. The 2018 Kobre & Kim report claimed the GDB sought to compute the 15% debt limitation appropriately. 108 Official Statement, “Puerto Rico Sales Tax Financing Corporation Sales Tax Revenue Bonds, Series 2007B,” July 23, 2007, https://emma.msrb.org/MS261958-MS237266-MD462937.pdf. Congressional Research Service 17 Puerto Rico’s Public Debts: Accumulation and Restructuring law firm partner expressed doubt that a court would bar clawback of COFINA funds—an opinion not shared with investors.109 In 2009, bond filings began to note, in general terms, the potential legal risks presented by COFINA’s structure.110 Some major mutual funds, which had bought Puerto Rico securities at par when issued before the island’s fiscal challenges became evident, sharply reduced their holdings of the island’s public debt in late 2013 and 2014, prompting sharp drops in bond prices.111 A significant portion of those sales were to hedge funds with a stronger appetite for complex debt restructuring processes.112 Many GO bondholders believed that restructuring the island’s public corporations’ debts or clawing back COFINA revenues could help the government meet GO bond obligations, prompting contention with COFINA bondholder groups.113 Conflicts also emerged between senior COFINA bondholders, which included several mainland financial institutions and hedge funds, and junior COFINA bondholders, who tended to be individual residents of Puerto Rico.114 Much of the COFINA-GO litigation included coalitions of major bondholders, such as the Ad Hoc Group of Puerto Rico GO Bondholders, the COFINA Senior Bondholders Coalition, and the Bonistas del Patio, a group claiming to represent island-based junior COFINA bondholders.115 Three bond insurers (Ambac, National Public Finance, and Assured Guaranty), also known as monolines, also participated actively in negotiations and litigation.116 These groups played a role in congressional deliberations that led to PROMESA’s enactment. The constitutional fiscal provisions became more salient as the prospect of a default of Puerto Rico’s government loomed, triggering heightened tensions among bondholders. In July 2016, a group of GO bondholders sued then-Governor García Padilla to demand a clawback of COFINA-pledged revenues. In April 2017, a federal appeals court held that PROMESA stay provisions applied.117 That suit and other litigation, however, convinced the Oversight Board that the GO-COFINA dispute needed to be resolved through the PROMESA Title III process.118 109 Kobre & Kim LLP, Final Investigative Report, August 20, 2018, https://drive.google.com/file/d/19-lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, pp. 160-161, 164-165, 174-175. 110 Ibid., pp. 187-188. 111 Bond Buyer, “Oppenheimer, Franklin Cut Puerto Rico Debt Holdings Amid Rally,” September 12, 2018. 112 Matt Wirz, Andrew Scurria, and Heather Gillers, “Bond Funds Dump Puerto Rico: Investor Exodus from Puerto Rico Built Speed in October,” Wall Street Journal, October 25, 2017, https://www.wsj.com/articles/bond-funds-dump-puerto-rico-1508929380. 113 Michael Cembalist, “Passage to Puerto Rico,” J.P. Morgan, Eye on the Market, July 11, 2016, https://www.jpmorgan.com/directdoc/passagetopuertorico.pdf. 114 Joanisabel González, “COFINA Bondholders Head to Boston,” El Nuevo Día, March 16, 2017, https://www.elnuevodia.com/english/english/nota/cofinabondholdersheadtoboston-2301236/. 115 Joel Cintrón Arbasetti and Carla Minet, “Old Colleagues Gather in a Group that Requires Puerto Rico to Pay the Debt,” Center for Investigative Journalism, October 24, 2017, http://periodismoinvestigativo.com/2017/10/old-colleagues-gather-in-a-group-that-requires-puerto-rico-to-pay-the-debt/. Joel Cintrón Arbasetti and Carla Minet, “Map of the Players and their Positions in the Puerto Rico Debt Game,” Center for Investigative Journalism, July 23, 2015, http://periodismoinvestigativo.com/2015/07/map-of-the-players-and-their-positions-in-the-puerto-rico-debt-game/. 116 Heather Gillers, “Bond Insurers Prepare for the Worst in Puerto Rico,” Wall Street Journal, June 30, 2016. 117 Order and Opinion, Lex Claims, LLC, et al. v. Garcia-Padilla, et al, case 17-1241, April 4, 2017, media.ca1.uscourts.gov/pdf.opinions/17-1241P-01A.pdf. 118 Jaresko Declaration, In re: COFINA, p. 10, January 12, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTAxNzgz&id2=0. Congressional Research Service 18 link to page 52 Puerto Rico’s Public Debts: Accumulation and Restructuring New Governor Inaugurated in January 2017 In January 2017, Governor Ricardo Rosselló Nevares succeeded Governor García Padilla, who did not seek reelection.119 The new governor took steps to restructure the island government, including setting up FAFAA,120 which took over financial management roles from the GDB. Rothschild & Co. were brought in to replace previous restructuring advisors.121 The new governor abandoned the PREPA RSA and revamped PREPA’s governance by letting the chief restructuring officer’s contract lapse and replacing the PREPA board appointed in 2017 with his own appointees.122 Rosselló Nevares also disbanded a commission set up by his predecessor to audit the island’s public debts.123 Oversight Board Files PROMESA Title III Petitions in May 2017 PROMESA required the Oversight Board to take several steps to restructure debts. In an initial step, as noted above, the Board listed the CPR and the bulk of the island’s public corporations as covered instrumentalities under terms of PROMESA.124 That designation required the governor to draft fiscal plans for the CPR and covered instrumentalities, whether or not the instrumentalities’ debts were to be restructured. Fiscal plans and budgets are subject to certification by the Board, which can impose its own plan if the governor’s draft is deemed inadequate. Where the Board viewed debt restructuring as necessary, the next step was to petition a federal district court to initiate PROMESA Title III proceedings. The subsequent steps that put the GO-COFINA dispute into the Title III court followed in rapid succession in late April and early May 2017. Puerto Rico enacted a measure to claw back COFINA funds to the general fund,125 triggering a default declaration on COFINA bonds on May 4, 2017.126 A day before, on May 3, 2017, the FOMB filed a petition to restructure CPR’s obligations under Title III of PROMESA.127 119 His father, Pedro Rosselló González, served as governor of Puerto Rico from 1993 until 2001. Former Governor García Padilla supports maintaining Puerto Rico’s current status. Former Governor Rosselló Nevares and current Governor Pedro Pierluisi Urrutia advocate statehood for Puerto Rico. Divergent views on Puerto Rico’s political status have traditionally distinguished the island’s political parties in the postwar era. 120 Act 2 of 2017, January 18, 2017, and Oversight Board, “Covered Entities List,” November 18, 2016, https://drive.google.com/file/d/1D37UiofV0T5s1Q4J54vs3xX_ArGF9532/view. 121 Eric Platt, “Rothschild to Advise Puerto Rico on $69bn Debt Restructuring,” Financial Times, January 18, 2017, https://www.ft.com/content/b00acb45-341b-3501-888a-4685fc9ee4e6. 122 The PREPA RSA of November 2015 specified that the Puerto Rican governor choose a board of three members from a list “of at least 10 candidates prepared by a recognized firm in the field of search for executive candidates, according to objective criteria that take into account professional and educational backgrounds.” See GDB, Restructuring Support Agreement, November 2, 2015, p. 98, at http://www.gdb-pur.com/investors_resources/documents/PREPA-RSA-RestructuringSupportAgreement-FullyExecuted.pdf. Rosselló’s 2016 campaign treasurer was appointed chair of the PREPA board. See Javier Balmaceda, “Puerto Rico’s PREPA Privatization: A Sale Too Private,” Forbes, April 3, 2018, https://www.forbes.com/sites/debtwire/2018/04/03/puerto-ricos-prepa-privatization-a-sale-too-private/?sh=4a5358a27490. 123 Gloria Ruiz Kuilan, “Rosselló Elimina la Comisión para la Auditoría de la Deuda,” El Nuevo Día, April 19, 2017, https://www.elnuevodia.com/noticias/politica/notas/rossello-elimina-la-comision-para-la-auditoria-de-la-deuda/. See further discussion in the section “An Audit of Puerto Rico’s Public Debt.” 124 PROMESA §101(d)(1)(A). 125 Fiscal Plan Compliance Act, Act 26-2017, April 29, 2017. 126 Robert Slavin, “COFINA Trustee Declares Default; Seniors Call for End of Subordinate Payments,” Bond Buyer, May 10, 2017. Also see Bank of New York Mellon, letter to COFINA Trustees, May 4, 2017, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NjIwMzQ1&id2=0. 127 Financial Oversight and Management Board (FOMB), Petition for Relief on Behalf of the Commonwealth of Puerto Congressional Research Service 19 Puerto Rico’s Public Debts: Accumulation and Restructuring On May 5, 2017, the Board then filed a Title III petition for COFINA,128 and on May 21, 2017, it filed a petition for HTA.129 The Board also initiated a Title III process for PREPA on July 2, 2017, and thus rejected the previous RSA framework.130 The Board also used PROMESA Title VI, which sets out a different procedure, to settle debts and operations of the GDB. The Board approved the GDB’s restructuring petition in July 2017, and the bank was dissolved in November 2018.131 Most of its functions, as noted above, were taken over by the FAFAA. Judge Swain then directed the Oversight Board to resolve disputes among GO and COFINA creditors through confidential mediation overseen by a senior bankruptcy judge. On August 10, 2017, Judge Swain appointed the Unsecured Creditors Committee (UCC) to represent Commonwealth interests and Bettina Whyte to represent COFINA interests.132 Negotiations were surrounded by a cascade of litigation by various interested parties.133 Hurricanes Irma and María Hit Puerto Rico in September 2017 Two Category 5 hurricanes soon stalled progress in those negotiations. In September 2017, Hurricane Irma skirted the northern edge of Puerto Rico, and two weeks later, Hurricane María passed over the whole island, leaving major damage in its wake.134 The hurricanes affected the debt restructuring process in several ways. First, the island’s electrical grid was disabled, which crippled many water and sewer facilities, as well as most manufacturing facilities and transportation systems. Health, housing, and incomes also were affected. Second, the disaster responses commanded the attention of public officials and others. The hurricanes’ damage to public infrastructure, including the island’s electrical grid, and to private businesses, including most manufacturing facilities, prompted the Oversight Board to revise the Commonwealth’s fiscal plan to reflect reduced economic activity and tax revenues. The Board anticipated that federal disaster recovery funding—which it estimated would total $82 billion—would enhance Rico, May 3, 2017, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NjE3NjAy&id2=0. 128 FOMB, Petition for Relief on Behalf of COFINA, May 5, 2018, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NjE3ODQx&id2=0. 129 FOMB, Petition for Relief on Behalf of HTA, May 21, 2017, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NjIzMjkw&id2=0. 130 FOMB, Petition for Relief on Behalf of PREPA, July 2, 2017, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NzA4NjU1&id2=0. 131 In re: GDB, Findings of Fact, Conclusions of Law, and Order, November 7, 2018, https://document.epiq11.com/document/getdocumentbycode/?docId=3427095&projectCode=PR4&source=DM. 132 Stipulation and Order Approving Procedure to Resolve Commonwealth-COFINA Dispute, In re FOMB as Representative of Commonwealth of Puerto Rico, case 17-03283-LTS, August 10, 2017, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NzAwNDI5&id2=0. Bettina Whyte was managing director and senior advisor at Alvarez & Marsal, a New York financial advisory firm. 133 At this writing in May 2022, the Commonwealth Title III docket contained over 20,600 filings—a rough indicator of the complexity of the case. 134 John P. Cangialosi, Andrew S. Latto, and Robbie Berg, “Tropical Cyclone Report: Hurricane Irma,” National Hurricane Center, AL112017, June 30, 2018, https://www.nhc.noaa.gov/data/tcr/AL112017_Irma.pdf; and Richard J. Pasch, Andrew B. Penny, and Robbie Berg, “Tropical Cyclone Report: Hurricane Maria,” National Hurricane Center, February 14, 2019, AL152017, https://www.nhc.noaa.gov/data/tcr/AL152017_Maria.pdf. Congressional Research Service 20 link to page 27 Puerto Rico’s Public Debts: Accumulation and Restructuring the ability to repay creditors in future years.135 Much of that funding, however, has been slow in coming.136 Settling the COFINA/GO Dispute The COFINA Senior Bondholders Coalition, a coalition of hedge funds and investment groups, played a central role in negotiations that led to a settlement of the COFINA/GO dispute over payment priority. The coalition controlled about a third of outstanding senior COFINA debt and substantial amounts of COFINA subordinate (junior) bonds. In June 2015, the coalition retained the law firm Quinn Emanuel and lead counsel Susheel Kirpalani.137 After selling off about half of their COFINA junior bonds after Hurricane María hit, the coalition increased its holdings of those bonds from $709 million in October 2017 to $2.222 billion at the end of October 2018, as shown in Figure 3.138 Over that interval—October 2017 to October 2018—the price of COFINA senior bonds rose from about 35% to over 80% of par, and junior bonds rose from about 10% of par to about 50% of par. On May 14, 2018, the COFINA Senior Bondholders Coalition proposed a framework to settle the GO/COFINA dispute,139 which the Oversight Board reportedly rejected as offering the CPR no “meaningful debt relief.”140 Further negotiations led to an agreement in principle, announced on June 5, 2018, that would allocate 53.65% of the Pledged Sales Tax Base Amount—set at 5.5% of the 10.5% Sales & Use Tax—to COFINA.141 Judge Swain, according to media reports, viewed the draft agreement favorably, as it could sidestep calls to rule on the validity of COFINA’s legal structure under the Puerto Rico Constitution.142 Under the proposed framework, existing COFINA bonds would be exchanged for new securities designed to reduce debt service obligations over the next decade, but carrying stronger investor protections. Certain COFINA creditors were to collect about $1.2 billion held in escrow.143 The reduction in COFINA claims allowed the CPR government a greater share of sales and use tax 135 Oversight Board, Commonwealth Revised Fiscal Plan, October 23, 2018, p. 17, https://drive.google.com/file/d/17ca0ALe7vpYn0jEzTz3RfykpsFSM0ujK/view. 136 See CRS Report R46609, The Status of Puerto Rico’s Recovery and Ongoing Challenges Following Hurricanes Irma and María: FEMA, SBA, and HUD Assistance, coordinated by Elizabeth M. Webster. 137 Second Supplemental Verified Statement of the Senior COFINA Bondholders’ Coalition Pursuant to Federal Rule of Bankruptcy Procedure 2019, case 17-03283-LTS, docket #1552, October 26, 2017. Also see Michelle Bocanegra, “MVP: Quinn Emanuel’s Susheel Kirpalani,” Law360, November 30, 2018, https://www.law360.com/articles/1094205/mvp-quinn-emanuel-s-susheel-kirpalani. In that interview, UCC lead counsel Luc Despins is described as a mentor. 138 See the corresponding 7th verified statement, November 16, 2018, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=ODk5ODcw&id2=0. 139 BusinessWire, “COFINA Senior Bondholders Coalition Discloses Participation in Constructive Settlement Discussions to Help Resolve Puerto Rico’s Debt Crisis,” May 14, 2018, https://www.businesswire.com/news/home/20180514005558/en/. 140 Eva Lloréns Vélez, “GO-COFINA Bondholder Sides Head for Shootout,” Caribbean Business, July 13, 2018, https://caribbeanbusiness.com/go-cofina-bondholder-sides-head-for-shootout/. 141 Michelle Kaske, “Puerto Rico’s Sales-Tax Bonds Soar on Optimism About Deal,” Bloomberg News, June 8, 2018, https://www.bloomberg.com/news/articles/2018-06-08/puerto-rico-cofina-investors-get-half-sales-tax-in-proposed-deal. 142 Eva Lloréns Vélez, “GO-COFINA Bondholder Sides Head for Shootout,” Caribbean Business, July 13, 2018. 143 Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA), COFINA Fiscal Plan, p. 5, September 7, 2018, http://www.aafaf.pr.gov/assets/cofina-fiscal-plan-090718.pdf. Congressional Research Service 21 Puerto Rico’s Public Debts: Accumulation and Restructuring revenues, which, in principle, would benefit GO bondholders. Island taxpayers also appear to have benefited from a reduction of certain tax rates enacted in December 2018.144 Figure 3. COFINA Holdings of Senior COFINA Bondholders Coalition Source: CRS calculations using Rule 2019 filings on the COFINA docket. Notes: Baupost, headed by Seth Klarman, controls the investment vehicles named Decagon Holdings. See David Dayen, “We Can Finally Identify One of the Largest Holders of Puerto Rican Debt,” Intercept, October 3, 2017, https://theintercept.com/2017/10/03/we-can-finally-identify-one-of-the-largest-holders-of-puerto-rican-debt/. 144 Act 257-2018, enacted December 18, 2018. See Price Waterhouse Coopers, “Puerto Rico Adopts Significant Amendments to its Income Tax Code,” January 2019, https://www.pwc.com/us/en/services/tax/library/insights/puerto-rico-significant-amendments-to-income-tax-code.html. Congressional Research Service 22 Puerto Rico’s Public Debts: Accumulation and Restructuring The Oversight Board announced a deal with major COFINA creditors in August 2018.145 Once the Puerto Rican government enacted conforming legislation,146 the Oversight Board certified a revised COFINA fiscal plan.147 On October 18, 2018, the Board filed a disclosure statement that detailed the proposed restructuring of COFINA debt.148 On November 27, 2018, the Title III court approved149 a revised disclosure statement,150 clearing the way for a vote among classes of COFINA bondholders for approval.151 The UCC, representing the interests of Commonwealth creditors, conditionally approved the agreement in early November 2018 after having complained about the settlement.152 Many junior COFINA bondholders contended the settlement was unfair. Some alleged that key Senior COFINA Bondholders Coalition members had purchased enough junior bonds to attain a decisive position in settlement negotiations, to the advantage of senior COFINA bondholders and the detriment of junior COFINA bondholders.153 Small investors also complained about $332 million in consummation costs awarded to major investors involved in negotiations.154 Several small COFINA bondholder suits were dismissed by the Title III court. The U.S. Court of Appeals for the First Circuit upheld those dismissals on February 8, 2021.155 In a separate case, that court upheld on March 2, 2021, the dismissal of claims of Puerto Rico credit unions—called cooperativas—who contended they were pressured to buy COFINA junior bonds.156 145 FOMB, “Oversight Board Reaches Deal with COFINA Bondholders: Proposed COFINA Bondholders Agreement to Save Puerto Rico over $17 Billion,” August 8, 2018, https://drive.google.com/file/d/1xGS5aCydodTTGhhCtk3OhHLFD6I_Qnny/view. 146 Act 241 of 2018, November 15, 2018, http://www.lexjuris.com/lexlex/Leyes2018/lexl2018241a.htm. 147 FOMB, Unanimous Written Consent Certifying COFINA’s Fiscal Plan, October 19, 2018, https://drive.google.com/file/d/1KL0LsMGXtOaNPJ8YPKMpJCCs37uKZT9C/view. 148 FOMB, Disclosure Statement for the Title III Plan of Adjustment of the Debts of Puerto Rico Sales Tax Financing Corporation, Case No. 17-BK-3284 (LTS), October 18, 2018, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=ODk3NzAy&id2=0. Bankruptcy Code §1125 incorporated into PROMESA (§301(a)) required the Oversight Board to file a disclosure statement ahead of voting by creditors to accept or reject the plan. 149 In re CPR and In re COFINA, Order Approving Disclosure Statement, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTAwMTE5&id2=0. 150 FOMB, Disclosure Statement for the Amended Title III Plan of Adjustment of the Debts of Puerto Rico Sales Tax Financing Corporation, Case No. 17-BK-3284 (LTS), November 16, 2018, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=ODk5NzQw&id2=0. In re CPR and In re COFINA, Disclosure Statement for the Second Amended Title III Plan of Adjustment, November 26, 2018, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTAwMDAw&id2=0. 151 A memorandum, which congressional clients may request, describes the structure of the new COFINA bond issue. 152 Robert Slavin, “COFINA Deal Takes Step Forward with Proposed Settlement,” Bond Buyer, November 6, 2018. 153 Eva Lloréns Vélez, “‘Bonistas’ Tout COFINA Deal Impact on Local Capital,” Caribbean Business, October 22, 2018, https://caribbeanbusiness.com/bonistas-tout-cofina-deal-impact-on-local-capital/. 154 A list of the Consummation Cost Parties is presented as Term Sheet Exhibit B (p. 367) of the second amended disclosure statement of November 26, 2018. The Consummation Cost provision is at pp. 362-364. 155 For a summary of a hearing on four related appeals contesting the COFINA settlement, see Robert Slavin, “COFINA $17.6B Deal Attacked in Appeals Court,” Bond Buyer, August 3, 2020. One of the judges who heard arguments in August 2020, Juan R. Torruella, died in October 2020. In re Fin. Oversight & Mgmt. Bd. for Puerto Rico, 987 F.3d 173 (1st Cir. 2021), http://media.ca1.uscourts.gov/pdf.opinions/, http://media.ca1.uscourts.gov/pdf.opinions/
19-1181P-01A.pdf. 19-1181P-01A.pdf.
~~152~~156 Cooperativa de Ahorro y Credito v. Cooperativa de Ahorro y Credito v. ~~Oversight Board, Judgement and Opinion, case 19-1391, U.S. Court of Appeals~~
~~for the 1st Circuit, March 2, 2021~~Fin. Oversight & Mgmt. Bd. (In re Fin. Oversight & Mgmt. Bd.), 989 F.3d 123 (1st Cir. 2021), http://media.ca1.uscourts.gov/pdf.opinions/19-1391P-01A.pdf. , http://media.ca1.uscourts.gov/pdf.opinions/19-1391P-01A.pdf.
~~153 Arthur J. González, “Lawful Restructuring Compromises Are Key to Puerto Rico’s Future,” Morning Consult,~~
Congressional Research Service Congressional Research Service

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Puerto Rico’s Public Debts: Accumulation and Restructuring

Oversight Board, Title III Court Move to Wrap Up COFINA Restructuring Arthur González, a member of the FOMB, argued that the proposed COFINA agreement was a prudent compromise, which avoided litigation that could end with a judgement that would either find that COFINA and its bondholders own the island’s sales tax revenues, which would sharply reduce the funds available for other constituencies, or that the Commonwealth has the right to claw them back. A loss for the Commonwealth would be a particularly devastating setback, costing the local government billions of dollars in reduced debt and recouped revenue over the coming decades.157 Natalie Jaresko, executive director of the Oversight Board, stated in a court filing that the Natalie Jaresko, executive director of the Oversight Board, stated in a court filing that the
alternative alternative ~~to the Plan is protracted litigation . . . which could lead to an all-or-nothing~~
to the Plan is protracted litigation . . . which could lead to an all-or-nothing recovery for holders of either Commonwealth claims or COFINA’s Existing Securities.recovery for holders of either Commonwealth claims or COFINA’s Existing Securities.~~154~~158
Court Approves Restructuring and Bond Exchange in February 2019
On February 4, 2019, as noted above, Judge Swain approved the COFINA settlement and On February 4, 2019, as noted above, Judge Swain approved the COFINA settlement and
confirmed its restructuring plan,confirmed its restructuring plan,~~155~~159 marking one of the largest municipal bond restructurings in marking one of the largest municipal bond restructurings in
U.S. history and thus resolving the GO-COFINA dispute.U.S. history and thus resolving the GO-COFINA dispute.~~156~~160 On February 12, 2019, old COFINA On February 12, 2019, old COFINA
debt with a par value of $17.6 debt with a par value of $17.6 ~~bil ion~~ billion was exchanged for $12 was exchanged for $12 ~~bil ion~~billion in new COFINA bonds, in new COFINA bonds,
which were divided into several current-interest-bearing bonds (CIBs; i.e., normal bonds) and which were divided into several current-interest-bearing bonds (CIBs; i.e., normal bonds) and
capital appreciation bonds (CABs), for which capital appreciation bonds (CABs), for which ~~bal oon~~balloon payments would be due in future decades, payments would be due in future decades,
the last ones ending in 2058.the last ones ending in 2058.~~157~~
161 Concerns over COFINA Settlement and Ethical Conflicts
Some investment firms reported significant gains from holdings of Puerto Rican public debt and Some investment firms reported significant gains from holdings of Puerto Rican public debt and
in particular, COFINA bonds.in particular, COFINA bonds.~~158~~162 A group of hedge funds, which acquired COFINA bonds at 157 Arthur J. González, “Lawful Restructuring Compromises Are Key to Puerto Rico’s Future,” Morning Consult, ~~A group of hedge funds, which acquired COFINA bonds at~~
~~distressed prices and then spearheaded creditor negotiations, reportedly made “hundreds of~~
~~mil ions of dollars” in profits.159 Some smal er-scale bondholders complained that the exchange~~
~~was mishandled and that their interests were not protected in negotiations, from which they were~~
~~excluded.160 For instance, rounding protocols, according to some, disadvantaged investors with~~

November 20, 2018, https://morningconsult.com/opinions/lawful-restructuring-compromises-are-key-to-puerto-ricos-November 20, 2018, https://morningconsult.com/opinions/lawful-restructuring-compromises-are-key-to-puerto-ricos-
future/. González had served as chief judgefuture/. González had served as chief judge of the U.S. Bankruptcy Court for the Southern District of New York.of the U.S. Bankruptcy Court for the Southern District of New York.
~~154~~ 158 Jaresko Declaration, In re: COFINA, Jaresko Declaration, In re: COFINA, §§9, 67, January 12, 2019, https://cases.primeclerk.com/puertorico/Home-§§9, 67, January 12, 2019, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=DownloadPDF?id1=~~OT AxNzgz~~OTAxNzgz&id2=0. &id2=0.
~~155~~ 159 Memorandum Opinion and Order Approving Settlement between Commonwealth of Puerto Rico and Puerto Rico Memorandum Opinion and Order Approving Settlement between Commonwealth of Puerto Rico and Puerto Rico
SalesSales ~~T ax~~ Tax Financing Corporation, U.S. District Court for Financing Corporation, U.S. District Court for ~~th e~~the District of Puerto Rico, Case 17-03283, February 4, 2019, District of Puerto Rico, Case 17-03283, February 4, 2019,
https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=~~OT AzMDUx~~OTAzMDUx&id2=0. &id2=0.
~~156 T he~~160 The confirmation involved one filing on the Commonwealth of Puerto Rico (CPR) docket ( confirmation involved one filing on the Commonwealth of Puerto Rico (CPR) docket ( 17-03283) and two 17-03283) and two
filingsfilings in the COFINA docket (17-03284). On the CPR docket, see Memorandum Opinion and Order Approving in the COFINA docket (17-03284). On the CPR docket, see Memorandum Opinion and Order Approving
Settlement between Commonwealth of Puerto Rico and Puerto Rico SalesSettlement between Commonwealth of Puerto Rico and Puerto Rico Sales ~~T ax~~ Tax Financing Corporation, U.S. District Financing Corporation, U.S. District
Court for the District of Puerto Rico, Case 17-03283, February 4, 2019, https://cases.primeclerk.com/puertorico/Home-Court for the District of Puerto Rico, Case 17-03283, February 4, 2019, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=DownloadPDF?id1=~~OT AzMDUx~~OTAzMDUx&id2=0. On the COFINA&id2=0. On the COFINA docket, two filingsdocket, two filings on February 4, 2019, were superseded on February 4, 2019, were superseded
by amended documents filed the next day. Seeby amended documents filed the next day. See ~~Amended~~ Amended Order and Judgment Confirming the Order and Judgment Confirming the ~~3 rd Amended T itle~~3rd Amended Title III III
Plan Of Adjustment of Plan Of Adjustment of ~~P uerto~~Puerto Rico Sales Rico Sales ~~T ax~~ Tax Financing Corporation, U.S. District Court for the District of Puerto Financing Corporation, U.S. District Court for the District of Puerto
Rico, February 5, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=Rico, February 5, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=~~OT AzMjM4~~OTAzMjM4&id2=0. Also &id2=0. Also
see Amendedsee Amended Memorandum of FindingsMemorandum of Findings of Fact and Conclusionsof Fact and Conclusions of Law, U.S.of Law, U.S. District Court for the District of Puerto District Court for the District of Puerto
Rico, February 5, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=Rico, February 5, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=~~OT AzMjI0~~OTAzMjI0&id2=0. &id2=0.
~~157~~161 Robert Slavin, Robert Slavin, “COFINA Swaps“COFINA Swaps Out BondsOut Bonds in Biggestin Biggest U.S. MuniU.S. Muni Restructuring,” Restructuring,” Bond Buyer, February, February 12, 2019. 12, 2019.
Seven sets of CABsSeven sets of CABs mature in years ranging from mature in years ranging from ~~202 4~~2024 through 2051. through 2051. ~~T he~~The largest balloon payments are scheduled largest balloon payments are scheduled for for
2046 ($1.1 billion) and 2051 ($640 million). 2046 ($1.1 billion) and 2051 ($640 million).
~~158~~ 162 Michelle Celarier, “Puerto Rican Bonds Power Hedge Michelle Celarier, “Puerto Rican Bonds Power Hedge ~~Fund~~ Fund Whitebox Advisors’ 2018 Gains:Whitebox Advisors’ 2018 Gains: ~~T he~~ The Bonds Were a Bonds Were a
Bright Spot for Whitebox and Other HedgeBright Spot for Whitebox and Other Hedge ~~Funds~~ Funds in an Otherwise Dismal Year,” in an Otherwise Dismal Year,” Institutional Investor, January 29, , January 29,
2019. Also see Michelle Celarier, “2019. Also see Michelle Celarier, “~~T ilden~~Tilden Park is Having a Big Park is Having a Big Year: Josh Birnbaum’sYear: Josh Birnbaum’s Firm is Up DoubleFirm is Up Double Digits on the Congressional Research Service 24 link to page 27 link to page 27 Puerto Rico’s Public Debts: Accumulation and Restructuring distressed prices and then spearheaded creditor negotiations, reportedly made “hundreds of millions of dollars” in profits.163 Some smaller-scale bondholders complained that the exchange was mishandled and that their interests were not protected in negotiations, from which they were excluded.164 For instance, rounding protocols, according to some, disadvantaged investors with smaller holdings and advantaged those who held major positions.165 Judge Swain dismissed objections that small holders were excluded from mediation, stating that individual ~~Digits on the~~
~~Back of a Deal for its Puerto Rico Bonds,” Institutional Investor, November 29, 2018,~~
~~https://www.institutionalinvestor.com/article/b1c1175xfxk6t1/Tilden-Park-is-Having-a-Big-Year.~~
~~159 Andrew Scurria, “Hedge Funds Bask in Puerto Rico Bond Deal: Bondholders Offering Debt Relief in $18 Billion~~
~~Renegotiation Gain Substantial Profits,” Wall Street Journal, February 9, 2019, https://www.wsj.com/articles/hedge-~~
~~funds-bask-in-puerto-rico-bond-deal-11549713600. In court filings, the group calls itself the Senior COFINA~~
~~Bondholders Coalition.~~
~~160 Peter Hein, Response to Request by FOMB, In re COFINA, June 4, 2019, https://cases.primeclerk.com/puertorico/~~
~~Congressional Research Service~~

24

~~link to page 26 link to page 26~~ ~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~smal er holdings and advantaged those who held major positions.161 Judge Swain dismissed~~
~~objections that smal holders were excluded from mediation, stating that individual~~ investors were investors were
not prevented “from advocating their positions and seeking to participate in negotiations,” that not prevented “from advocating their positions and seeking to participate in negotiations,” that
investors were “welcome to reach out to the mediation team,” and that investors could object to investors were “welcome to reach out to the mediation team,” and that investors could object to
proposals resulting from mediation and other negotiations.proposals resulting from mediation and other negotiations.~~162~~166
Some contend that links among the Whitebox investment fund, a member of the Senior COFINA Some contend that links among the Whitebox investment fund, a member of the Senior COFINA
Bondholders Coalition; the Compass funds; and McKinsey, the main consultant to the Oversight Bondholders Coalition; the Compass funds; and McKinsey, the main consultant to the Oversight
Board, posed conflicts of interest that were not properly disclosed.Board, posed conflicts of interest that were not properly disclosed.~~163~~167 The Board commissioned a The Board commissioned a
review that asserted that McKinsey’s investments posed no conflict, although they “could create review that asserted that McKinsey’s investments posed no conflict, although they “could create
the appearance of a potential conflict.”the appearance of a potential conflict.”~~164~~168 The following day, McKinsey paid $15 The following day, McKinsey paid $15 ~~mil ion~~ million to settle to settle
~~claims that it failed to disclose conflicts of interest in 14 other bankruptcy cases.165~~
~~Board Pivots GO Restructuring in 2019~~
~~The resolution—apart from certain appeals—of the COFINA restructuring cleared a path to~~
~~address restructuring of GO bonds and debts of other entities closely tied to the island~~
~~government, such as the Employee Retirement System (ERS) and the Public Building Authority~~
~~(PBA). The PBA constructs buildings that are leased to agencies of the island government.~~
~~On January 14, 2019, the Oversight Board, in conjunction with its special claims committee and~~
~~the UCC, chal enged the validity of $6 bil ion (at par value) of GO bonds issued after 2011—~~
~~referred to as “late vintage GO”—such as the $3.5 bil ion 2014 issue placed with hedge funds,~~
~~al egedly issued in violation of a constitutional debt limitation.166 In May 2019, the Oversight~~
~~Board and the UCC filed over 250 avoidance action suits167 and sued bankers involved in the~~

~~Home-DownloadPDF?id1=OT EzMzcw&id2=0.~~
~~161 Michelle Kaske, “Puerto Rico Bondholders Fume for Being Shortchanged in Swap,”~~ claims that it failed to disclose conflicts of interest in 14 other bankruptcy cases.169 In November 2021, the Securities and Exchange Commission (SEC) levied a $19 million fine on MIO Partners, a subsidiary of McKinsey.170 Back of a Deal for its Puerto Rico Bonds,” Institutional Investor, November 29, 2018, https://www.institutionalinvestor.com/article/b1c1175xfxk6t1/Tilden-Park-is-Having-a-Big-Year. 163 Andrew Scurria, “Hedge Funds Bask in Puerto Rico Bond Deal: Bondholders Offering Debt Relief in $18 Billion Renegotiation Gain Substantial Profits,” Wall Street Journal, February 9, 2019, https://www.wsj.com/articles/hedge-funds-bask-in-puerto-rico-bond-deal-11549713600. In court filings, the group calls itself the Senior COFINA Bondholders Coalition. 164 Peter Hein, Response to Request by FOMB, In re COFINA, June 4, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTEzMzcw&id2=0. 165 Michelle Kaske, “Puerto Rico Bondholders Fume for Being Shortchanged in Swap,” Bloomberg, February 22, 2019, Bloomberg, February 22, 2019,
https://www.bloomberg.com/news/articles/2019-02-22/puerto-rico-investors-fume-as-debt-swap-leaves-some-https://www.bloomberg.com/news/articles/2019-02-22/puerto-rico-investors-fume-as-debt-swap-leaves-some-
shortchanged. shortchanged.
~~162~~ 166 In re: CPR, Omnibus In re: CPR, Omnibus hearing, March 4, 2020, pp. 213hearing, March 4, 2020, pp. 213 -214, https://cases.primeclerk.com/puertorico/Home--214, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=DownloadPDF?id1=~~OT YwMT E1~~OTYwMTE1&id2=0. &id2=0.
~~163~~167 Michelle Celarier, “ Michelle Celarier, “~~T he~~The Story McKinsey Didn’t Want Written,” Story McKinsey Didn’t Want Written,” Institutional Investor, July 8, 2019, , July 8, 2019,
https://www.institutionalinvestor.com/article/b1g5zjdcr97k2y/The-Story-McKinsey-Didn-t-Want-Written. https://www.institutionalinvestor.com/article/b1g5zjdcr97k2y/The-Story-McKinsey-Didn-t-Want-Written. SeeSee Figure
3 for a summary of Whitebox holdings of COFINAfor a summary of Whitebox holdings of COFINA bonds. Also see Mary Williams Walsh,bonds. Also see Mary Williams Walsh, “ “McKinsey AdvisesMcKinsey Advises Puerto Puerto
Rico on Debt. It May Profit on the Outcome,” Rico on Debt. It May Profit on the Outcome,” New York ~~Tim es~~Times, September 26, 2018. , September 26, 2018.
~~164~~ 168 In re: CPR, Informative Motion Regarding Publication and Filing In re: CPR, Informative Motion Regarding Publication and Filing of Final Investigative Report: McKinsey & Co., of Final Investigative Report: McKinsey & Co.,
February 18, 2019, https://drive.google.com/file/d/1avv872k0XNonEiN9x0UzNUCUYDtYkqOd/view?usp=drivesdk. February 18, 2019, https://drive.google.com/file/d/1avv872k0XNonEiN9x0UzNUCUYDtYkqOd/view?usp=drivesdk.
~~165~~169 In re: Westmoreland et al., In re: Westmoreland et al., Mediated Settlement Term Sheet between the U.S. Trustee Program and the McKinsey
Entities, U.S., U.S. Bankruptcy Court, Southern District of Bankruptcy Court, Southern District of ~~T exas~~Texas, Houston Division, February 19, 2019, , Houston Division, February 19, 2019,
https://www.justice.gov/opa/press-release/file/1133251/download. Also see Peter Wells, “https://www.justice.gov/opa/press-release/file/1133251/download. Also see Peter Wells, “ McKinsey Agrees to $15M McKinsey Agrees to $15M
Settlement over Bankruptcy Disclosures,” Settlement over Bankruptcy Disclosures,” Financial Times, February, February ~~19, 2019.~~
~~166 Urgent Motion of the FOMB, Case 17-BK-3283 (LT S), January 14, 2019, https://cases.primeclerk.com/puertorico/~~
~~Home-DownloadPDF?id1=OT AyMjAz&id2=0. T he motion alleged that after 2012, issuance of GO bonds violated the~~
~~Puerto Rico’s Constitution’s Article VI Section 2 requirement that average debt service in the past two years not exceed~~
~~15% of revenues. T he motion also conten ded that the guaranteed debt of the Public Building Authority (PBA) and the~~
~~PBA leases to CPR agencies constituted a scheme to avoid the 15% limit. T hose claims were pulled back after~~
~~negotiations with creditors.~~
~~167 Abner Dennis, “Puerto Rico’s Debt Battles: T he Oversight Board Goes on a Suing Spree,” Little Sis webpage, June~~
~~5, 2019, https://news.littlesis.org/2019/06/05/puerto-ricos-debt-battles-the-oversight -board-goes-on-a-suing-spree/. T he~~
~~Board acted through a Special Claims Committee. See “ Commonwealth of Puerto Rico Avoidance Actions,”~~
~~https://cases.primeclerk.com/puertoricoavoidanceactions/Home-Index.~~
~~Congressional Research Service~~

25

~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~2014 GO bond issue.168 Avoidance actions al ow a trustee to chal enge transactions involving~~
~~debtors before the filing of a bankruptcy petition.169~~
~~The Board did not explain why it chose to chal enge GO bonds backed by a constitutional~~
~~guarantee, but did not chal enge~~ 19, 2019. 170 The SEC found that “in January and February of 2017, MIO was directly invested in the municipal bonds of Puerto Rico at the same time McKinsey was providing restructuring advice to the Puerto Rico Financial Oversight & Management Board (“FOMB”), the entity charged with spearheading Puerto Rico’s financial turnaround. During this time frame, the Investments Committee, which included active McKinsey partners with access to McKinsey Client MNPI, was empowered under the Investments Committee Charter to oversee MIO’s direct investments, including MIO’s sale of nearly $1 million worth of Puerto Rican bonds. Further, in addition to MIO’s direct investments in Puerto Rico, through at least June 2017, MIO was also invested in Puerto Rico’s debt via its SMAs [separately managed accounts] and other third-party managed funds.” In re MIO Partners, SEC Admin. Proc. 3-20656, at p. 3, November 19, 2021, https://www.sec.gov/litigation/admin/2021/ia-5912.pdf. Congressional Research Service 25 Puerto Rico’s Public Debts: Accumulation and Restructuring Board Pivots to GO Restructuring in 2019 The resolution—apart from certain appeals—of the COFINA restructuring cleared a path to address restructuring of GO bonds and debts of other entities closely tied to the island government, such as the Employee Retirement System (ERS) and the Public Building Authority (PBA). The PBA constructs buildings that are leased to agencies of the island government. On January 14, 2019, the Oversight Board, in conjunction with its special claims committee and the UCC, challenged the validity of $6 billion (at par value) of GO bonds issued after 2011—referred to as “late vintage GO”—such as the $3.5 billion 2014 issue placed with hedge funds, allegedly issued in violation of a constitutional debt limitation.171 In May 2019, the Oversight Board and the UCC filed over 250 avoidance action suits172 and sued bankers involved in the 2014 GO bond issue.173 Avoidance actions allow a trustee to challenge transactions involving debtors before the filing of a bankruptcy petition.174 The Board did not explain why it chose to challenge GO bonds backed by a constitutional guarantee, but did not challenge the legal and constitutional basis of COFINA bonds. One the legal and constitutional basis of COFINA bonds. One
investment analyst concluded “[t]he tacit support [by U.S. District Court Judge Swain] for the investment analyst concluded “[t]he tacit support [by U.S. District Court Judge Swain] for the
securitized structure represented by COFINA should be a welcome development for a municipal securitized structure represented by COFINA should be a welcome development for a municipal
market that has been transitioning away from full faith and credit GO pledges and toward market that has been transitioning away from full faith and credit GO pledges and toward
dedicated revenue pledges with perfected liens.”dedicated revenue pledges with perfected liens.”~~170~~175 A coalition of bond insurers and bondholders A coalition of bond insurers and bondholders
filed a motion defending the validityfiled a motion defending the validity of the GO bonds on March 21, 2019.of the GO bonds on March 21, 2019.~~171~~176
2020: Oversight Board, Hedge Funds Negotiate Over GO Bonds
On May 31, 2019, after negotiations with creditors, the Oversight Board announced a Plan On May 31, 2019, after negotiations with creditors, the Oversight Board announced a Plan
Support Agreement (PSA) for GO bonds and debt issued by ERS and PBA. The PSA was Support Agreement (PSA) for GO bonds and debt issued by ERS and PBA. The PSA was
supported by the Lawful Constitutional Debt Coalition (LCDC); some other hedge funds, supported by the Lawful Constitutional Debt Coalition (LCDC); some other hedge funds,
including some members of the COFINA Senior Bondholders Coalition; and some retiree and including some members of the COFINA Senior Bondholders Coalition; and some retiree and
labor groups.labor groups.~~172~~
~~The Oversight Board released an amended PSA on February 9, 2020, claiming to have the~~
~~backing of holders of $10 bil ion in GO and Public Building Authority bonds,173 followed by a~~
~~draft disclosure statement on February 28, 2020.174 The Oversight Board claimed that holders of~~
~~58% of outstanding GO and PBA debt had signed onto the PSA.175 The new PSA offered slightly~~
~~better terms for holders of GO and guaranteed debt, but worse terms for junior bonds.176 Future~~
~~debt service would fal from levels that fluctuate around $3 bil ion to $1.5 bil ion per year.~~
~~In contrast to the wrap-up of the COFINA case, the GO bond case has been delayed by a series of~~
~~obstacles. On March 27, 2020, the Title III court, at the request of the Oversight Board,~~
~~suspended consideration of the adequacy of the disclosure statement covering the proposed~~
~~restructuring of GO, PBA, and ERS debt due to the effects of the Coronavirus Disease 2019~~

~~168 In Re: CPR, Complaint, May 5, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=~~
~~OT ExMT Y2&id2=0.~~
~~169~~177 171 Urgent Motion of the FOMB, Case 17-BK-3283 (LTS), January 14, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTAyMjAz&id2=0. The motion alleged that after 2012, issuance of GO bonds violated the Puerto Rico’s Constitution’s Article VI Section 2 requirement that average debt service in the past two years not exceed 15% of revenues. The motion also contended that the guaranteed debt of the Public Building Authority (PBA) and the PBA leases to CPR agencies constituted a scheme to avoid the 15% limit. Those claims were pulled back after negotiations with creditors. 172 Abner Dennis, “Puerto Rico’s Debt Battles: The Oversight Board Goes on a Suing Spree,” Little Sis webpage, June 5, 2019, https://news.littlesis.org/2019/06/05/puerto-ricos-debt-battles-the-oversight-board-goes-on-a-suing-spree/. The Board acted through a Special Claims Committee. See “Commonwealth of Puerto Rico Avoidance Actions,” https://cases.primeclerk.com/puertoricoavoidanceactions/Home-Index. 173 In Re: CPR, Complaint, May 5, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTExMTY2&id2=0. 174 John D. Ayer, Michael Bernstein, and Jonathan Friedland, “Overview of Avoidance Actions,” John D. Ayer, Michael Bernstein, and Jonathan Friedland, “Overview of Avoidance Actions,” American Bankruptcy
Institute Journal, March 2004. , March 2004.
~~170~~175 Axios Advisors Managing Partner Axios Advisors Managing Partner ~~T riet~~Triet Nguyen quoted in Robert Slavin, Nguyen quoted in Robert Slavin, “COFINA Money Likely to Flow“COFINA Money Likely to Flow Soon,” Soon,”
Bond Buyer, February 5, 2019. , February 5, 2019.
~~171~~176 Robert Slavin, Robert Slavin, “Puerto Rico Investors Move to Defend Legality of Bonds,” “Puerto Rico Investors Move to Defend Legality of Bonds,” Bond Buyer, March 21, 2019; PBA , March 21, 2019; PBA
Funds’,Funds’, Assured’s,Assured’s, ~~And QT CB~~ And QTCB Noteholder Group’s Rule Noteholder Group’s Rule 12(C) Motion for Judgment on the Pleadings, Case12(C) Motion for Judgment on the Pleadings, Case 18-00149-18-00149-
~~LT S~~LTS, March 21, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=, March 21, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=~~OT A3NDEx~~OTA3NDEx&id2=0. &id2=0.
~~172~~ 177 LCDC LCDC comprises Aristeia Capital, Farmstead Capital, FCOcomprises Aristeia Capital, Farmstead Capital, FCO Advisors, Advisors, ~~GoldenT ree~~GoldenTree, Marble Ridge, Marble Ridge Capital, Monarch Capital, Monarch
Alternative Capital, Alternative Capital, ~~T aconic~~Taconic Capital, and Whitebox Advisors. See Oversight Board, Capital, and Whitebox Advisors. See Oversight Board, Am ended Disclosure Statem ent,
~~February 9, 2019, p. 11, https://drive.google.com/file/d/1_JApEw_dGRQCpgAVo0SaffZrVuap6WqQ/view. Golden~~
~~T ree, T aconic, and Whitebox were major members of the Senior COFINA Bondholders Coalition.~~
~~173 Oversight Board, Plan Support Agreement, February 9, 2019, p. 8.~~
~~174 Oversight Board, Disclosure Statement for the Amended Title III Joint Plan of Adjustment of the CPR, et al. ,~~
~~February 28, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT Q0OTAy&id2=0.~~
~~175 In re: CPR, Omnibus hearing, March 4, 2020, p. 18, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?~~
~~id1=OT YwMT E1&id2=0.~~
~~176 Brad W. Setser, “What Exactly is in the New Agreement Between Puerto Rico’s Board and its Creditors?” Council~~
~~on Foreign Relations Blog Post, February 11, 2020, https://www.cfr.org/blog/what -exactly-new-agreement -between-~~
~~puerto-ricos-board-and-its-creditors.~~
~~Congressional Research Service~~

26

~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~(COVID-19) pandemic.177~~ Amended Disclosure Statement, Congressional Research Service 26 Puerto Rico’s Public Debts: Accumulation and Restructuring The Oversight Board released an amended PSA on February 9, 2020, claiming to have the backing of holders of $10 billion in GO and Public Building Authority bonds,178 followed by a draft disclosure statement on February 28, 2020.179 The Oversight Board claimed that holders of 58% of outstanding GO and PBA debt had signed onto the PSA.180 The new PSA offered slightly better terms for holders of GO and guaranteed debt, but worse terms for junior bonds.181 Future debt service would fall from levels that fluctuate around $3 billion to $1.5 billion per year. In contrast to the wrap-up of the COFINA case, the GO bond case has been delayed by a series of obstacles. On March 27, 2020, the Title III court, at the request of the Oversight Board, suspended consideration of the adequacy of the disclosure statement covering the proposed restructuring of GO, PBA, and ERS debt due to the effects of the Coronavirus Disease 2019 (COVID-19) pandemic.182 The Board has filed regular status reports on its activities relevant to The Board has filed regular status reports on its activities relevant to
that case and on effects of the pandemic.that case and on effects of the pandemic.~~178~~183 The Board, in its December 2020 report, stated that The Board, in its December 2020 report, stated that
negotiations continue, but declined to offer details due to confidentiality restrictions. negotiations continue, but declined to offer details due to confidentiality restrictions.
Accusations of Insider Trading in the GO Restructuring Process
On February 25, 2020, the Title III Court received On February 25, 2020, the Title III Court received ~~al egations~~allegations of insider trading by coalitions of of insider trading by coalitions of
hedge funds involved in GO restructuring mediation and negotiations. On the same date, the UCC hedge funds involved in GO restructuring mediation and negotiations. On the same date, the UCC
~~cal ed~~called for more specific disclosures of holdings by participants in the GO mediation. For instance, for more specific disclosures of holdings by participants in the GO mediation. For instance,
previous disclosure filings reported aggregate holdings that combined GO debt with a full faith previous disclosure filings reported aggregate holdings that combined GO debt with a full faith
and credit pledge and PBAand credit pledge and PBA bonds that carried a CPR guarantee, distinctions that bonds that carried a CPR guarantee, distinctions that ~~potential y~~potentially
translated into different treatment in restructuring plans. On June 8, 2020, Judge Swain ordered translated into different treatment in restructuring plans. On June 8, 2020, Judge Swain ordered
that creditor disclosures fully conform to Federal Rule of Bankruptcy Procedure 2019(b) that creditor disclosures fully conform to Federal Rule of Bankruptcy Procedure 2019(b)
standards.standards.~~179~~
184 One analysis of changes in mediation participants’ holdings as reported in amended disclosure One analysis of changes in mediation participants’ holdings as reported in amended disclosure
filings asserted that LCDC members had increased holdings of GO bonds issued after 2011—filings asserted that LCDC members had increased holdings of GO bonds issued after 2011—
referred to as late vintage GO bonds—while in an overlapping time period the LCDC and the referred to as late vintage GO bonds—while in an overlapping time period the LCDC and the
Oversight Board had sought to invalidate the late vintage bonds.Oversight Board had sought to invalidate the late vintage bonds.~~180~~185 That analysis also pointed to February 9, 2019, p. 11, https://drive.google.com/file/d/1_JApEw_dGRQCpgAVo0SaffZrVuap6WqQ/view. Golden Tree, Taconic, and Whitebox were major members of the Senior COFINA Bondholders Coalition. 178 Oversight Board, Plan Support Agreement, February 9, 2019, p. 8. 179 Oversight Board, Disclosure Statement for the Amended Title III Joint Plan of Adjustment of the CPR, et al., February 28, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTQ0OTAy&id2=0. 180 In re: CPR, Omnibus hearing, March 4, 2020, p. 18, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTYwMTE1&id2=0. 181 Brad W. Setser, “What Exactly is in the New Agreement Between Puerto Rico’s Board and its Creditors?” Council on Foreign Relations Blog Post, February 11, 2020, https://www.cfr.org/blog/what-exactly-new-agreement-between-puerto-ricos-board-and-its-creditors. 182 ~~That analysis also pointed to~~
~~bond price changes that appeared to coincide with confidential mediation sessions in mid-January~~
~~2020. Hedge funds and other institutional investors denied that their members had either traded~~
~~during restricted periods or traded on nonpublic information.181~~
~~Calls for Investigations of Alleged Insider Trading~~
~~In June 2020, Oversight Board Executive Director Natalie Jaresko testified that she was aware of~~
~~insider trading al egations, but considered those a matter for law enforcement.182 On August 5,~~
~~2020, five House Members sent a letter to the New York State Attorney General requesting an~~
~~investigation into possible violations of that state’s Martin Act, which covers a broad range of~~

~~177~~ In re: CPR, In re: CPR, Order, March 27, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=, March 27, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=
~~OT Q5Nzg0~~OTQ5Nzg0&id2=0. &id2=0.
~~178~~183 Oversight Board, Oversight Board, Status Report, May 1, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=, May 1, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=
~~OT U3MjM0~~OTU3MjM0&id2=0. Also see Oversight Board, &id2=0. Also see Oversight Board, Status Report, December 4, 2020, https://cases.primeclerk.com/, December 4, 2020, https://cases.primeclerk.com/
puertorico/Home-DownloadPDF?id1=puertorico/Home-DownloadPDF?id1=~~OT k2MDI5~~OTk2MDI5&id2=0. &id2=0.
~~179~~184 Order Further Amending Case Management Procedures, U.S., U.S. District Court for the District of Puerto Rico, Case District Court for the District of Puerto Rico, Case
17 BK17 BK 3283-LTS, June 8, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=3283-LTS, June 8, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=~~OT U5OT U2~~OTU5OTU2&id2=&id2=
0. 0.
~~180~~185 Abner Dennis, “21 Vulture Funds Abner Dennis, “21 Vulture Funds Stalking Puerto Rico’s Central Government: Legal Challenges,Stalking Puerto Rico’s Central Government: Legal Challenges, Investments, Investments,
Insider Insider ~~T rading~~Trading,” Public,” Public Accountability Initiative webpage, AugustAccountability Initiative webpage, August 5, 2020, https://public-accountability.org/report/5, 2020, https://public-accountability.org/report/
the-21-vulture-funds-stalking-puerto-ricos-central-government-legal-challenges-investments-insider-trading/. the-21-vulture-funds-stalking-puerto-ricos-central-government-legal-challenges-investments-insider-trading/.
~~181 Robert Slavin, “Puerto Rico Board, Investment Funds Reject Court Investigation of Insider T rading,” Bond Buyer,~~
~~October 15, 2020. Also see Reply of LCDC, In re: CPR, October 15, 2020, https://cases.primeclerk.com/puertorico/~~
~~Home-DownloadPDF?id1=OT g1NzM2&id2=0. T rading of securities by an insider while in possession of material~~
~~nonpublic information may constitute insider trading barred by federal securities law. See Cindy A. Schipani and H.~~
~~Nejat Seyhun, “Defining ‘Material, Nonpublic’: What Should Constitute Illegal Insider Information?”~~ ~~Fordham~~
~~Journal of Corporate & Financial Law, vol. XXI, 2016, pp. 327-378.~~
~~182 T estimony of Oversight Board Executive Director Natalie Jaresko, in U.S. Congress, House Committee on Natural~~
~~Resources, PROMESA Im plem entation During the Coronavirus Pandem ic, 116th Cong., 2nd sess., June 11, 2020, Serial~~
~~116–35, p. 97.~~
~~Congressional Research Service~~

27

~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~securities dealings.183 Resident Commissioner Jenniffer González asked the U.S. Securities and~~
Congressional Research Service 27 Puerto Rico’s Public Debts: Accumulation and Restructuring bond price changes that appeared to coincide with confidential mediation sessions in mid-January 2020. Hedge funds and other institutional investors denied that their members had either traded during restricted periods or traded on nonpublic information.186 Calls for Investigations of Alleged Insider Trading In June 2020, Oversight Board Executive Director Natalie Jaresko testified that she was aware of insider trading allegations, but considered those a matter for law enforcement.187 On August 5, 2020, five House Members sent a letter to the New York State Attorney General requesting an investigation into possible violations of that state’s Martin Act, which covers a broad range of securities dealings.188 Resident Commissioner Jenniffer González asked the U.S. Securities and Exchange Commission to consider whether securities laws were violated. Exchange Commission to consider whether securities laws were violated.
On October 5, 2020, House Committee on Natural Resources Chair Raúl Grijalva On October 5, 2020, House Committee on Natural Resources Chair Raúl Grijalva and other and other
Members sent the Oversight Board a letter requesting an investigation into those Members sent the Oversight Board a letter requesting an investigation into those ~~al egations.184~~allegations.189
On the same day, a bond insurer, National Public Finance, asked the Title III Court to investigate On the same day, a bond insurer, National Public Finance, asked the Title III Court to investigate
insider trading and related insider trading and related ~~al egations.185~~allegations.190 Both requests were declined. The Oversight Board Both requests were declined. The Oversight Board
demurred on an investigation, but pledged to contact the U.S. Department of Justice, explaining demurred on an investigation, but pledged to contact the U.S. Department of Justice, explaining
~~that~~
that given the investigative resources available to Department and its expertise in investigating given the investigative resources available to Department and its expertise in investigating
the conduct at issue, the Oversight Board believes the Department is better suited than the the conduct at issue, the Oversight Board believes the Department is better suited than the
Oversight Board to evaluate the evidence and to determine whether federal laws have been Oversight Board to evaluate the evidence and to determine whether federal laws have been
violated.violated. ~~This approach will also avoid saddling the Commonwealth with a potentialy~~ This approach will also avoid saddling the Commonwealth with a potentially
expansive and expensive investigation.expansive and expensive investigation.~~186~~
191 Judge Swain declined bond insurer National Public Finance’s motion to direct the U.S. Trustee or Judge Swain declined bond insurer National Public Finance’s motion to direct the U.S. Trustee or
another entity to conduct an investigation, writing that “neither PROMESA nor any provision of another entity to conduct an investigation, writing that “neither PROMESA nor any provision of
the Bankruptcy Code that is incorporated into Title III explicitly authorizes this Court to initiate the Bankruptcy Code that is incorporated into Title III explicitly authorizes this Court to initiate
an independent investigation along the lines of the investigation sought by National in its an independent investigation along the lines of the investigation sought by National in its
Motion.”Motion.”~~187~~192 Moreover, Judge Swain found that “National ha[d] not proffered evidence sufficient Moreover, Judge Swain found that “National ha[d] not proffered evidence sufficient
~~to support a reasonable inference that any participant in the Mediation has traded on inside~~
~~information to the detriment of counterparties or the bond market, much less to the detriment of~~
~~the Title III and Mediation processes.”~~
~~Restructuring on Hold in 2020~~
~~The final resolution to the Title III case for GO bonds and related debts was in limbo for much of~~
~~2020 for several reasons. First, the COVID-19 pandemic, as elsewhere, has disrupted normal~~
~~operations and cast in doubt previous projections of Puerto Rico’s economic and fiscal future. A~~
~~series of earthquakes hit the southwest of Puerto Rico in early 2020, further disrupting operations.~~
~~Second, al egations that hedge funds involved in negotiations had traded bonds using nonpublic~~
~~information prompted Judge Swain to order more detailed disclosures, which in turn has~~
~~prompted further litigation. Third, former Resident Commissioner Pedro Pierluisi Urrutia was~~
~~inaugurated as governor in January 2021. Changes in the governor’s office have typical y led to~~
~~major staffing changes in island agencies and public corporations.188 Fourth, some of the original~~
~~Oversight Board members have stepped down and the process of appointing new members or~~

~~183 N.Y. Gen. Bus. Law §§352, 352-c.~~
~~184~~to support a reasonable inference that any participant in the Mediation has traded on inside 186 Robert Slavin, “Puerto Rico Board, Investment Funds Reject Court Investigation of Insider Trading,” Bond Buyer, October 15, 2020. Also see Reply of LCDC, In re: CPR, October 15, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTg1NzM2&id2=0. Trading of securities by an insider while in possession of material nonpublic information may constitute insider trading barred by federal securities law. See Cindy A. Schipani and H. Nejat Seyhun, “Defining ‘Material, Nonpublic’: What Should Constitute Illegal Insider Information?” Fordham Journal of Corporate & Financial Law, vol. XXI, 2016, pp. 327-378. 187 Testimony of Oversight Board Executive Director Natalie Jaresko, in U.S. Congress, House Committee on Natural Resources, PROMESA Implementation During the Coronavirus Pandemic, 116th Cong., 2nd sess., June 11, 2020, Serial 116–35, p. 97. 188 N.Y. Gen. Bus. Law §§352, 352-c. 189 Letter of Chair Grijalva to Oversight Board Executive Director Natalie Jaresko, October 21, 2020, Letter of Chair Grijalva to Oversight Board Executive Director Natalie Jaresko, October 21, 2020,
https://naturalresources.house.gov/download/grijalva-house-letter-to-fomb-on-insider-trading-investigation-october-21-https://naturalresources.house.gov/download/grijalva-house-letter-to-fomb-on-insider-trading-investigation-october-21-
2020. 2020.
~~185~~190 National Public Finance Guarantee, National Public Finance Guarantee, Motion, In re: CPR, October 5, 2020, https://cases.primeclerk.com/puertorico/, In re: CPR, October 5, 2020, https://cases.primeclerk.com/puertorico/
Home-DownloadPDF?id1=Home-DownloadPDF?id1=~~OT g1NzM2~~OTg1NzM2&id2=0. &id2=0.
~~186~~ 191 Oversight Board, letter to Chairman Raul Grijalva, October 27, 2020, https://drive.google.com/file/d/10mffHf-R- Oversight Board, letter to Chairman Raul Grijalva, October 27, 2020, https://drive.google.com/file/d/10mffHf-R-
~~VOUfAT YZtRSWOO1GqZWDMQC/view.~~
~~187~~VOUfATYZtRSWOO1GqZWDMQC/view. 192 In re: CPR, In re: CPR, Order, October 28, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=, October 28, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=
~~OT g2Mjgz&id2=0.~~
~~188 José Alvarado Vega, “Pierluisi, Delgado Win Puerto Rico Primaries,” Caribbean Business, August 17, 2020,~~
~~https://caribbeanbusiness.com/pierluisi-delgado-win-puerto-rico-primaries/. Pierluisi also worked as a consultant to the~~
~~Oversight Board after his term as Resident Commissioner.~~
~~Congressional Research Service~~

28

~~link to page 34~~ ~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

OTg2Mjgz&id2=0. Congressional Research Service 28 Puerto Rico’s Public Debts: Accumulation and Restructuring information to the detriment of counterparties or the bond market, much less to the detriment of the Title III and Mediation processes.” Restructuring on Hold in 2020 The final resolution to the Title III case for GO bonds and related debts was in limbo for much of 2020 for several reasons. First, the COVID-19 pandemic, as elsewhere, has disrupted normal operations and cast in doubt previous projections of Puerto Rico’s economic and fiscal future. A series of earthquakes hit the southwest of Puerto Rico in early 2020, further disrupting operations. Second, allegations that hedge funds involved in negotiations had traded bonds using nonpublic information prompted Judge Swain to order more detailed disclosures, which in turn has prompted further litigation. Third, former Resident Commissioner Pedro Pierluisi Urrutia was inaugurated as governor in January 2021. Changes in the governor’s office have typically led to major staffing changes in island agencies and public corporations.193 Fourth, some of the original Oversight Board members have stepped down and the process of appointing new members or extending appointments of current members remains unfinished. Until the reappointment process extending appointments of current members remains unfinished. Until the reappointment process
had concluded, the Board’s composition and priorities were unclear. Fifth, the pace of disaster had concluded, the Board’s composition and priorities were unclear. Fifth, the pace of disaster
recovery funding, which was expected to bolster the island’s economy—and thus its ability to recovery funding, which was expected to bolster the island’s economy—and thus its ability to
service debts—in the medium term has been slow and uncertain.service debts—in the medium term has been slow and uncertain.~~189~~194 The Biden Administration has The Biden Administration has
released some of those recovery funds.released some of those recovery funds.~~190~~195
The Oversight Board discussed proposals to revise the plan of adjustment to reflect effects of the The Oversight Board discussed proposals to revise the plan of adjustment to reflect effects of the
COVID-19 pandemic on the island economy at its October 30, 2020, public meeting. A newly COVID-19 pandemic on the island economy at its October 30, 2020, public meeting. A newly
appointed member, Justin Peterson, left the online meeting, blocking a vote to modify the plan.appointed member, Justin Peterson, left the online meeting, blocking a vote to modify the plan.~~191~~196
Oversight Board Announces Revised GO PSA in February 2021
On October 29, 2020, Judge Swain ordered the Oversight Board to present “an informative On October 29, 2020, Judge Swain ordered the Oversight Board to present “an informative
motion presenting a term sheet disclosing the material economic and structural features of an motion presenting a term sheet disclosing the material economic and structural features of an
amended plan of adjustment that the Oversight Board intends to propose for confirmation” by amended plan of adjustment that the Oversight Board intends to propose for confirmation” by
February 10, 2021, which would cover GO debt, as February 10, 2021, which would cover GO debt, as ~~wel~~ well as debts of the Public Building as debts of the Public Building
Authority.Authority.~~192~~197 On that date, the Oversight Board announced that it had reached an agreement in On that date, the Oversight Board announced that it had reached an agreement in
principle with several major bondholders. Two weeks later it released the proposed amended plan principle with several major bondholders. Two weeks later it released the proposed amended plan
support agreement (PSA), which it filed with the Title III court on March 8, 2021.193 Table 1
~~compares terms of the February 2021 PSA with those of a plan discussed by the Oversight Board~~
~~in October 2020.~~
~~Although the total recovery value of the newly proposed GO settlement is higher than the plan~~
~~outlined by the Board in October 2020,194 it would be wel below that of the plan of adjustment~~
~~filed in February 2020 ($15.2 bil ion) or the creditors’ counterproposal of August 2020 ($15.3~~
~~bil ion), in part reflecting effects of the COVID-19 pandemic.195~~

~~189 See CRS~~ 193 José Alvarado Vega, “Pierluisi, Delgado Win Puerto Rico Primaries,” Caribbean Business, August 17, 2020, https://caribbeanbusiness.com/pierluisi-delgado-win-puerto-rico-primaries/. Pierluisi also worked as a consultant to the Oversight Board after his term as Resident Commissioner. 194 See CRS Report R46609, Report R46609, The Status of Puerto Rico’s Recovery and Ongoing Challenges Following Hurricanes
~~Irm a~~Irma and María: FEMA, SBA, and HUD Assistance, coordinated by Elizabeth M. Webster., coordinated by Elizabeth M. Webster.
~~190~~195 José A. Delgado José A. Delgado Robles,Robles, “White House Approves $3.7 Billion to Repair PRASA:“White House Approves $3.7 Billion to Repair PRASA: With the Newly Approved Funds, With the Newly Approved Funds,
the Federal Government has Promised More than $67.7 Billion for the Island’s Recovery and Reconstruction, the Federal Government has Promised More than $67.7 Billion for the Island’s Recovery and Reconstruction,
However, Only a However, Only a ~~T hird~~Third of the Money has Arrived,” of the Money has Arrived,” El Nuevo Día, January 6, 2021, https://www.elnuevodia.com/, January 6, 2021, https://www.elnuevodia.com/
english/news/story/white-house-approves-37-billion-to-repair-prasa/.english/news/story/white-house-approves-37-billion-to-repair-prasa/.
~~191~~196 Robert Slavin, Robert Slavin, “Puerto Rico Board Member Exercises Exit Veto,” “Puerto Rico Board Member Exercises Exit Veto,” Bond Buyer, October 30, 2020. Peterson is , October 30, 2020. Peterson is
managing director of the DCI Group, whichmanaging director of the DCI Group, which had worked on behalf of GOhad worked on behalf of GO ~~bondholders during~~ bondholders during Governor García Governor García
Padilla’s term in office (2013-3017). José A. DelgadoPadilla’s term in office (2013-3017). José A. Delgado ~~Robles~~ Robles and Joanisabeland Joanisabel González, “Donald González, “Donald ~~T rump~~Trump Picks Justin Picks Justin
Peterson as NewPeterson as New Oversight Board Member: Oversight Board Member: ~~T he~~The President Announces his Intention to Appoint a Partner of a President Announces his Intention to Appoint a Partner of a
Controversial Firm Representing Bondholders,” Controversial Firm Representing Bondholders,” El Nuevo Día, October 8, 2020, https://www.elnuevodia.com/english/, October 8, 2020, https://www.elnuevodia.com/english/
news/story/donald-trump-picks-justin-peterson-as-new-oversight-board-member/. news/story/donald-trump-picks-justin-peterson-as-new-oversight-board-member/.
~~192~~197 In re: CPR, Order on Joint Motion of PSA Creditors, October 29, 2020, https://cases.primeclerk.com/puertorico/ In re: CPR, Order on Joint Motion of PSA Creditors, October 29, 2020, https://cases.primeclerk.com/puertorico/
Home-DownloadPDF?id1=Home-DownloadPDF?id1=~~OT g2NDIy&id2=0.~~
~~193 In re: CPR, Oversight Board,~~ ~~Second Amended Title III Joint Plan Of Adjustment of the Commonwealth of Puerto~~
~~Rico, et al., March 8, 2021, https://drive.google.com/file/d/1IP-znS391lEFMcg35u6flHfcndndyxec/view. Also see~~
~~Oversight Board, “Oversight Board Reaches Agreement in Principle on Debt: Creditors Holding About $7 Billion of~~
~~General Obligation and Public Building Authority Bonds Committed; Mediation Continues t o Gain Support Across~~
~~Broad Spectrum of Creditors,” press release, February 10, 2021, https://drive.google.com/file/d/~~
~~149MrGro7s_q6W5tc8QoxLpwRo8NArnYR/view. Also see Oversight Board, Am ended Plan Support Agreem ent,~~
~~February 23, 2021, https://drive.google.com/file/d/15zWXi83c0EOI8Pzw2uS_lYGgxRbugBsV/vie w.~~
~~194 Espacios Abiertos, “Nueva Propuesta del Pago de la Deuda Deja a Puerto Rico sin Dinero en Efectivo en Ocho~~
~~Años [New proposal for debt service would leave Puerto Rico without cash in eight years] ,” press release, February 10,~~
~~2021, https://espaciosabiertos.org/nueva-propuesta-del-pago-de-la-deuda-deja-a-puerto-rico-sin-dinero-en-efectivo-en-~~
~~ocho-anos/.~~
~~195 See Oversight Board, Plan of Adjustment Discussion, p. 53, October 30, 2020, https://drive.google.com/file/d/~~
~~1UDwg3-wMpsRhUdDbkpGS- wuZsoWte38d/view.~~
~~Congressional Research Service~~

29

~~link to page 34 link to page 34~~ ~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~Table 1. Comparison of February 2021 PSA and October 2020 Board Proposal~~
~~Dol ar amounts in mil ions~~OTg2NDIy&id2=0. Congressional Research Service 29 link to page 35 link to page 35 link to page 35 Puerto Rico’s Public Debts: Accumulation and Restructuring support agreement (PSA), which it filed with the Title III court on March 8, 2021.198 Table 1 compares terms of the February 2021 PSA with those of a plan discussed by the Oversight Board in October 2020. Although the total recovery value of the GO settlement proposed in February 2021 would have been higher than the plan outlined by the Board in October 2020,199 it would have been well below that of the plan of adjustment filed in February 2020 ($15.2 billion) or the creditors’ counterproposal of August 2020 ($15.3 billion), in part reflecting effects of the COVID-19 pandemic.200 Table 1. Comparison of February 2021 PSA and October 2020 Board Proposal Dollar amounts in millions
February 2021
October 2020
Item
PSA
PSA
Difference
Cash GO Cash GO
$7,02 $7,024a
$5,984 $5,984
$1,040 $1,040
Cash PBA Cash PBA
$1,073 $1,073
b
— —
Annual fixed payment GO & COFINA Sr Annual fixed payment GO & COFINA Sr
$1,150 $1,150
$1,050 $1,050
$100 $100
Time period Time period
25 years 25 years
20 years 20 years
5 years 5 years
GO bond issue GO bond issue
$6,683 $6,683
$4,980 $4,980
$1,703 $1,703
Capital Appreciation Bond issue Capital Appreciation Bond issue
$730; rises $730; rises to to
$1066 $1066
$0 $0
$730 $730
Annual Maximum on CVI Annual Maximum on CVI
from $200 to $400 from $200 to $400
$50 $50
from $150 to $350 from $150 to $350
Cumulative Maximum on CVI Cumulative Maximum on CVI
$3,500 $3,500
$1,000 $1,000
$2,500 $2,500
Time period for CVI Time period for CVI
22 years 22 years
20 years 20 years
2 years 2 years
Source: CRS analysis of CPR PSAs, Espacios Abiertos, CRS analysis of CPR PSAs, Espacios Abiertos, Oversight Board, Oversight Board, Plan of Adjustment Discussion,, pp. 51-57, pp. 51-57,
October 30, 2020, https://drive.google.com/file/d/1UDwg3-wMpsRhUdDbkpGS-wuZsoWte38d/view. October 30, 2020, https://drive.google.com/file/d/1UDwg3-wMpsRhUdDbkpGS-wuZsoWte38d/view.
Notes: CAB capital appreciation bonds are no-coupon bonds with CAB capital appreciation bonds are no-coupon bonds with ~~bal oon~~balloon payments near maturity. payments near maturity. Contingent Contingent
valuation instruments (CVIs) pay creditorsvaluation instruments (CVIs) pay creditors more if economic growth exceeds fiscal plan baseline projections.more if economic growth exceeds fiscal plan baseline projections.
a. Includes potential $350 mil iona. Includes potential $350 mil ion contingent on revenues above benchmarks.contingent on revenues above benchmarks.
b. PBA terms not included in October Board proposal.b. PBA terms not included in October Board proposal.
If If the terms of terms of ~~the most recent~~that PSA were implemented, existing bonds covered by the agreement PSA were implemented, existing bonds covered by the agreement
would would behave been exchanged for cash, new GO bonds, capital appreciation bonds (with interest only exchanged for cash, new GO bonds, capital appreciation bonds (with interest only
payable in future years), and contingent valuation instruments (CVIs) that would payable in future years), and contingent valuation instruments (CVIs) that would ~~pay creditors~~
~~extra~~ have paid creditors extra 198 In re: CPR, Oversight Board, Second Amended Title III Joint Plan Of Adjustment of the Commonwealth of Puerto Rico, et al., March 8, 2021, https://drive.google.com/file/d/1IP-znS391lEFMcg35u6flHfcndndyxec/view. Also see Oversight Board, “Oversight Board Reaches Agreement in Principle on Debt: Creditors Holding About $7 Billion of General Obligation and Public Building Authority Bonds Committed; Mediation Continues to Gain Support Across Broad Spectrum of Creditors,” press release, February 10, 2021, https://drive.google.com/file/d/149MrGro7s_q6W5tc8QoxLpwRo8NArnYR/view. Also see Oversight Board, Amended Plan Support Agreement, February 23, 2021, https://drive.google.com/file/d/15zWXi83c0EOI8Pzw2uS_lYGgxRbugBsV/view. 199 Espacios Abiertos, “Nueva Propuesta del Pago de la Deuda Deja a Puerto Rico sin Dinero en Efectivo en Ocho Años [New proposal for debt service would leave Puerto Rico without cash in eight years],” press release, February 10, 2021, https://espaciosabiertos.org/nueva-propuesta-del-pago-de-la-deuda-deja-a-puerto-rico-sin-dinero-en-efectivo-en-ocho-anos/. 200 See Oversight Board, Plan of Adjustment Discussion, p. 53, October 30, 2020, https://drive.google.com/file/d/1UDwg3-wMpsRhUdDbkpGS-wuZsoWte38d/view. Congressional Research Service 30 Puerto Rico’s Public Debts: Accumulation and Restructuring amounts if the island’s economic growth exceeded Oversight Board projections. The mix of amounts if the island’s economic growth exceeded Oversight Board projections. The mix of
new assets received would new assets received would ~~differ~~have differed for each old bond, with estimated recovery rates ranging from for each old bond, with estimated recovery rates ranging from
67.7% for the 2014 GO bond to 80.3% for pre-2011 PBA bonds, excluding CVI payments.67.7% for the 2014 GO bond to 80.3% for pre-2011 PBA bonds, excluding CVI payments.~~196~~
201 Certain creditor groups were to receive “consummation cost” payments in cash.202 Those recovery rates Those recovery rates ~~are wel~~ were well above what market prices above what market prices ~~indicate~~indicated were expected recovery rates for were expected recovery rates for
much of the period of the debt restructuring, as a later section discusses. much of the period of the debt restructuring, as a later section discusses.
The Oversight Board chairman claimed the proposed plan aimed at consensual agreement; that it The Oversight Board chairman claimed the proposed plan aimed at consensual agreement; that it
reflected harm to the island from hurricanes, the COVID-19 pandemic, and other natural reflected harm to the island from hurricanes, the COVID-19 pandemic, and other natural
disasters; that it was a fair deal for creditors; and that it would be a “once and done deal.”disasters; that it was a fair deal for creditors; and that it would be a “once and done deal.”~~197~~203 The The
plan also plan also ~~includes~~included reductions of 2%-3% in some pension payments above certain thresholds, reductions of 2%-3% in some pension payments above certain thresholds,
which the Board which the Board ~~contends~~contended would protect most pensioners from those reductions. would protect most pensioners from those reductions.~~198~~204 Pension Pension
reductions, creditor concerns, and macroeconomic uncertainties, among other considerations, reductions, creditor concerns, and macroeconomic uncertainties, among other considerations,
~~may spur~~have spurred opposition to the Board’s plan. opposition to the Board’s plan.~~199~~

~~196 Robert Slavin, “Puerto Rico Reaches Deal with Debt Holders with 14% Less Repayment,” Bond Buyer, February~~
~~23, 2021.~~
~~197 David Skeel, “Oversight Board: Right Deal for Puerto Rico Rests on Four Principles,” Bond Buyer, February 8,~~
~~2021.~~
~~198~~205 Governor Pedro Pierluisi was quoted as stating that the agreement was a “step forward,” although he vowed to oppose any plan that would result in reductions in public pension payments to retirees.206 Further Negotiations with Bond Insurers and Other Creditors On April 12, 2021, the Oversight Board announced an agreement in principle with two bond insurers, Assured Guaranty and National Public Finance Guarantee, regarding convention center and Highway and Transportation Authority bonds.207 A plan support agreement announced on May 5, 2021, involved treatment of the CPR clawback of revenues from certain public corporations.208 In mid-July 2021, the Board reached agreement with the Unsecured Creditors Coalition (UCC), which (as noted above) played a major role in debt negotiations.209 Later that 201 Robert Slavin, “Puerto Rico Reaches Deal with Debt Holders with 14% Less Repayment,” Bond Buyer, February 23, 2021. 202 See Article VI of the February 23, 2021, plan support agreement. 203 David Skeel, “Oversight Board: Right Deal for Puerto Rico Rests on Four Principles,” Bond Buyer, February 8, 2021. 204 Oversight Board, Oversight Board, Lowering Puerto Rico’s Debt to Sustainable Levels: Plan Support Agreement with Bondholders, ,
February 26, 2021, p. 6, https://drive.google.com/file/d/February 26, 2021, p. 6, https://drive.google.com/file/d/~~1wT LXvJRu2GI38DRcpOWuVHX2OvT wvAVo/view.~~
~~199~~1wTLXvJRu2GI38DRcpOWuVHX2OvTwvAVo/view. 205 Robert Slavin, Robert Slavin, “Puerto Rico Debt Restructuring Faces Several“Puerto Rico Debt Restructuring Faces Several Obstacles,” Bond Buyer, March 5, 2021. 206 Justine Coleman, “Puerto Rico Debt Restructure Plan Threatens Public Pensions,” The Hill, March 9, 2021, https://thehill.com/homenews/state-watch/542318-puerto-rico-debt-restructure-plan-threatens-public-pensions. 207 Oversight Board, “Agreement in Principle Summary: HTA, CCDA, and Clawback Claims,” April 12, 2021, https://drive.google.com/file/d/1ZOE9M4oqBlFNyhgrbFpN71NW8b6-f4Pa/view. Also see Robert Slavin, “Bond Insurers Solidify Their Support for Puerto Rico Deals,” Bond Buyer, May 6, 2021, https://www.bondbuyer.com/news/bond-insurers-solidify-their-support-for-puerto-rico-deals. 208 Oversight Board, “Oversight Board Completes Agreement with Assured Guaranty and National Public Finance Guarantee Corp.: Settles Asserted Clawback Claims Against the Commonwealth and Establishes Framework for a HTA Title III Plan of Adjustment,” press release, May 5, 2021, https://drive.google.com/file/d/1HKvFLiAG5Wv3c3xrkGakvnC0sqI_f8Y-/view. The plan support agreement is available at https://drive.google.com/file/d/1BqBUrjTk_xjtg1wEhOdnv3ul4WfUorld/view. 209 Lynne Funk, “PR Board Reaches Key Agreements with Insurers, Bondholders,” Bond Buyer, July 14, 2021, https://www.bondbuyer.com/news/pr-board-reaches-key-agreements-with-insurers-bondholders. Congressional Research Service 31 Puerto Rico’s Public Debts: Accumulation and Restructuring month, the two remaining bond insurers reached an agreement with the Board on their claims, which include bonds backed by rum taxes.210 As more creditors signed onto plan support agreements, the Title III court took additional steps to advance the process of restructuring of CPR and related debts. ~~Obstacles,” Bond Buyer, March 5, 2021.~~
~~Congressional Research Service~~

30

~~link to page 36 link to page 52 link to page 57~~ ~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~Governor Pedro Pierluisi was quoted as stating that the agreement was a “step forward,” although~~
~~he vowed to oppose any plan that would result in reductions in public pension payments to~~
~~retirees.200 On April 12, 2021, the Oversight Board announced an agreement in principle with two~~
~~bond insurers, Assured Guaranty and National Public Finance Guarantee.201 A plan support~~
~~agreement was announced on May 5, 2021, which removes one hurdle to implementation of the~~
~~CPR PSA. The agreement involves treatment of the CPR clawback of revenues from certain~~
~~public corporations.202~~
On May 11, 2021, the Title III On May 11, 2021, the Title III court scheduled hearings in July 2021~~court scheduling a hearing for July 13, 2021,~~ to assess the to assess the
adequacy of the adequacy of the proposed disclosure statement disclosure statement describing terms of the plan.211 On August 2, 2021, the court approved a disclosure statement and scheduled hearings on confirmation of the plan.212 An approval vote was also set with an October 4, 2021, deadline for return of ballots. The plan was approved by 47 out of 61 creditor classes, including 90% of the bondholder classes.213 On October 26, 2021, the Puerto Rican legislature approved legislation to issue new bonds,214 albeit after the island’s senate balked at passing the measure.215 The measure was enacted after parties agreed to further negotiations over provisions concerning public pensions and funding for the University of Puerto Rico.216 Judge Swain held eight days of hearings on the confirmation of the plan of adjustment in November 2021.217 Each day was structured to consider specific issues and hear from representatives for major creditor groups, the Oversight Board, some members of the public, and a few individual creditors.218 On January 18, 2022, Judge Swain confirmed the plan, clearing the 210 See PRIFA Related Plan Support Agreement, July 27, 2021, https://emma.msrb.org/P21480536-P21147944-P21561617.pdf. The agreement would provide cash equivalent to 10% of the value of bonds issued by the Puerto Rico Infrastructure Financing Authority (PRIFA) that are held by Ambac and National Guarantee, along with some contingent value securities. For more information on the cover over of rum taxes, see CRS Report R41028, The Rum Excise Tax Cover-Over: Legislative History and Current Issues, by Steven Maguire. 211 Laura Taylor Swain, U.S. District Judge, “Order Scheduling a Hearing on the Adequacy of Information Contained in the Disclosure Statement,” May 4, 2021, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=MTAxMjI3OA==&id2=0. 212 Laura Taylor Swain, U.S. District Judge, “Order Approving Disclosure Statement,” August 2, 2021, https://cases.primeclerk.com//puertorico/Home-DownloadPDF?id1=MTAyOTMyOQ==&id2=0. 213 Robert Slavin, “Most Puerto Rico Classes OK Plan of Adjustment, But Issues Remain,” Bond Buyer, November 5, 2021, https://www.bondbuyer.com/news/most-puerto-rico-classes-ok-plan-of-adjustment-but-issues-remain. 214 Act 53-2021 (PC 1003), enacted October 26, 2021, https://sutra.oslpr.org/osl/esutra/Prontuario.aspx?rid=139840. Also see Keila López Alicea and Javier Colón Dávila, “La Cámara y el Senado Aprueban el Proyecto 1003 que Habilita el Plan de Ajuste de la Deuda,” (House and Senate Approve PC 1003 to Enable Plan of Adjustment), El Nuevo Día, October 26, 2021, https://www.elnuevodia.com/noticias/legislatura/notas/la-camara-y-el-senado-aprueban-el-proyecto-1003-que-habilita-el-plan-de-ajuste-de-la-deuda/. 215 Maria Chutchian, “Puerto Rico Debt Restructuring at Risk Amid Uncertainty Over Key Bill,” Reuters, October 25, 2021, https://www.reuters.com/legal/transactional/puerto-rico-debt-restructuring-risk-amid-uncertainty-over-key-bill-2021-10-25/. 216 Proceedings before Laura Taylor Swain, U.S. District Judge, October 25, 2021, https://cases.ra.kroll.com/puertorico/Home-DownloadPDF?id1=MTA2MDUwNA==&id2=-1. Also see Yaritza Rivera Clemente, “El Senador Gregorio Matías: Voto Decisivo en la Aprobación del Proyecto de la Cámara 1003,” (Senator Gregorio Matías: Decisive Vote in the Approval of PC 1003), El Vocero, October 27, 2021, https://www.elvocero.com/gobierno/el-senador-gregorio-mat-as-voto-decisivo-en-la-aprobaci-n-del-proyecto-de-la/article_dc80d4a4-372c-11ec-bdb7-c7910dae3e48.html. 217 Laura Taylor Swain, U.S. District Judge, “Order Amending Confirmation Hearing Procedures,” October 28, 2021, https://www.prd.uscourts.gov/promesa/sites/promesa/files/documents/9/18877.pdf. Robert Slavin, “Puerto Rico Bankruptcy Judge Gives DOJ Until February to File Comments,” Bond Buyer, November 23, 2021, https://www.bondbuyer.com/news/puerto-rico-bankruptcy-judge-gives-doj-until-february-to-file-comments. Maria Chutchian, “Puerto Rico Bankruptcy Nears End as Debt Plan Goes Up for Approval,” Reuters, November 9, 2021, https://www.reuters.com/legal/transactional/puerto-rico-bankruptcy-nears-end-debt-plan-goes-up-approval-2021-11-08/. 218 Transcripts of each day of the CPR confirmation hearings can be found at https://cases.ra.kroll.com/puertorico/ Congressional Research Service 32 link to page 40 Puerto Rico’s Public Debts: Accumulation and Restructuring way for an exchange of new bonds for old. The confirmed plan preempted dozens of Puerto Rican laws and Article VI of the Puerto Rico Constitution, dismissed litigation related to clawback claims and pension bonds, and restructured public pension systems. Older public employees were transferred from a defined benefit system to a defined contribution system, while younger workers were slated to join the U.S. Social Security system. Puerto Rico policymakers had opposed reducing pension benefits, while the Oversight Board noted that existing pension funds lacked assets to pay those benefits. The plan preserves pension benefit levels to retirees receiving $1,500 per month or less. A Puerto Rican teachers’ association appealed the confirmation of the CPR plan. The 1st Circuit Court of Appeals declined to stay consummation of the plan,219 but heard arguments on the case on March 9, 2022.220 The doctrine of equitable mootness complicates efforts to reverse provisions of a consummated debt restructuring.221 Apparently Conflicting Claims on Recovery Rates The Board claimed that creditors would recover on average 69% of their claims, although for some creditor classes the reductions in bond values were as low as 10%.222 In February 2022, Governor Pedro Pierluisi Urrutia testified that the plan will reduce the central government’s debt from $34 billion to $7.4 billion, a 78% reduction. A third-party estimate,223 however, put recovery rates for older GO bonds at 95% and at 83% for 2014 GO bonds sold to hedge funds.224 Bond prices, as shown in the next section, largely align with that estimate. The divergence between claims of drastic reductions in debt levels and more modest reductions implied by the high recovery rates noted above appears to result from other features of the debt restructuring. Many creditor classes received cash payouts, long-term bonds with balloon-payment features (capital appreciation bonds; CABs), consummation cash payments used to help reach various agreements, and contingent valuation instruments (CVIs) tied to the island’s economic growth, which raise recovery rates. Moreover, new bonds carry interest rates higher than most other municipal bonds. Investors may note that after the termination of the Oversight Board, Puerto Rico would again lack a clear path to access federal bankruptcy processes. Market Perspectives on Debt Restructuring Trends in bond prices provide a window on investors’ views of the restructuring process and proposals as they proceed through the events described in previous sections. Figure 4 shows bond prices as a percentage of par from 2013 through February 2022 for selected issues of GO Home-DocketInfo. Docket numbers for the transcripts are: 19146, 19149, 19165, 19198, 19280, 19304, 19363, 19364. 219 Rick Archer, “Puerto Rican Teachers Say Pension Changes Go Too Far,” Law360, March 22, 2022, https://www.law360.com/articles/1475990. 220 FOMB v Federacion de Maestros de Puerto Rico, 1st Circ., case 22-1080, https://www.ca1.uscourts.gov/oralargs/22-1080_20220309. 221 Jones-Day, “Should Equitable Mootness Bar Appeals Only of Chapter 11 Plan Confirmation Orders?” newsletter, May 2021, https://www.jonesday.com/en/insights/2021/05/should-equitable-mootness-bar-appeals-only-of-chapter-11-plan-confirmation-orders. 222 PRIFA Related Plan Support Agreement, July 27, 2021, https://emma.msrb.org/P21480536-P21147944-P21561617.pdf. The agreement would provide cash equivalent to 10% of the value of bonds issued by the Puerto Rico Infrastructure Financing Authority (PRIFA) that are held by Ambac and National Guarantee, along with some contingent value securities. 223 Private correspondence with Cate Long. Details available to congressional clients upon request. 224 See section above “Last GO Bonds Sold Directly to Hedge Funds in March 2014.” Congressional Research Service 33 Puerto Rico’s Public Debts: Accumulation and Restructuring bonds; COFINA bonds; and bonds of the three largest Puerto Rican public corporations: PREPA, PRASA, and HTA. Congressional Research Service 34 Figure 4. Price Trends for Selected Puerto Rico Bonds: January 2013-February 2022 Source: CRS calculations based on the Municipal Securities Rulemaking Board EMMA site: https://emma.msrb.org/. Notes: All prices quoted as percentage of par value. CUSIPS (codes used to identify issuers and financial securities) ~~describing the restructuring of CPR and related debts.203~~
~~Implementation of the restructuring plan would require other approvals as wel before its~~
~~confirmation by the Title III court.~~
~~Market Perspectives on Debt Restructuring~~
~~Trends in bond prices provide a window on investors’ views of the restructuring process and~~
~~proposals as they proceed through the events described in previous sections. Figure 4 shows~~
~~bond prices as a percentage of par from 2013 through 2020 for selected issues of GO bonds;~~
~~COFINA bonds; and bonds of the three largest Puerto Rican public corporations: PREPA,~~
~~PRASA, and HTA.~~
~~Bond prices, according to finance theory, reveal market expectations of the probability of default~~
~~and recovery rates—that is, the value of what bondholders would receive after default and~~
~~restructuring.204 Once the prospect of default became a certainty, bond prices then reflected~~
~~market expectations of recovery rates. Appendix B presents data on bond prices and trading~~
~~volumes for a narrower time period. Appendix C lists key dates with links to key documents.~~

~~200 Justine Coleman, “Puerto Rico Debt Restructure Plan T hreatens Public Pensions,” The Hill, March 9, 2021,~~
~~https://thehill.com/homenews/state-watch/542318-puerto-rico-debt-restructure-plan-threatens-public-pensions.~~
~~201 Oversight Board, “Agreement in Principle Summary: HT A, CCDA, and Clawback Claims,” April 12, 2021,~~
~~https://drive.google.com/file/d/1ZOE9M4oqBlFNyhgrbFpN71NW8b6-f4Pa/view.~~
~~202 Oversight Board, “Oversight Board Completes Agreement with Assured Guaranty and National Public Finance~~
~~Guarantee Corp.: Settles Asserted Clawback Claims Against the Commonwealth and Establishes Framework for a~~
~~HT A T itle III Plan of Adjustment,” press release, May 5, 2021, https://drive.google.com/file/d/~~
~~1HKvFLiAG5Wv3c3xrkGakvnC0sqI_f8Y-/view. T he plan support agreement is available at https://drive.google.com/~~
~~file/d/1BqBUrjT k_xjtg1wEhOdnv3ul4WfUorld/view.~~
~~203 Laura T aylor Swain, U.S. District Judge, “Order Scheduling a Hearing on the Adequacy of Information Contained~~
~~in the Disclosure Statement,” May 4, 2021, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=~~
~~MT AxMjI3OA==&id2=0.~~
~~204 A risk-neutral investor would calculate a bond’s value as (1-α)*(present value of principal and interest payments) +~~
~~α*(recovery value), where α is the probability of default. Given that default on the bulk of Puerto Rico’s debt was~~
~~highly likely or certain by mid-2015, bond prices would then directly reflect market expectations of recovery rates.~~
~~Holders of some bonds backed by dedicated revenue streams have argued that default on those bonds was not~~
~~inevitable, although such arguments gained no traction in the T itle III court.~~
~~Congressional Research Service~~

31

~~Figure 4. Price Trends for Selected Puerto Rico Bonds~~

Source: CRS calculations based on the Municipal Securities Rulemaking Board EMMA site: https://emma.msrb.org/.
~~Notes:~~ ~~Al prices quoted as percentage of par value. CUSIPS (codes used to identify issuers and financial securities)~~ are 2006A (74514LHN0), 2009B (74514LVW4), are 2006A (74514LHN0), 2009B (74514LVW4),
2011A GO (74514LYW1), 2012A (74514LA98), 2014A NY Law GO (74514LE86), PREPA (74526QVX7), PRASA (745160QF1), HTA (745181K97), COFINA 2011A GO (74514LYW1), 2012A (74514LA98), 2014A NY Law GO (74514LE86), PREPA (74526QVX7), PRASA (745160QF1), HTA (745181K97), COFINA
Subordinated (74529JHN8), and COFINA SeniorSubordinated (74529JHN8), and COFINA Senior (74529JNX9). The first vertical grey line indicates the release(74529JNX9). The first vertical grey line indicates the release of the August of the August ~~201 3~~2013 Barron’s article; the second is the article; the second is the
introduction of a local bankruptcy measure.introduction of a local bankruptcy measure. COFINA bonds were exchanged for new bonds on February 12, 2019. Values interpolated betweenCOFINA bonds were exchanged for new bonds on February 12, 2019. Values interpolated between trade dates. trade dates.
CRS- CRS-3235

link to page link to page 3157 link to page 65 link to page 32 Puerto Rico’s Public Debts: Accumulation and Restructuring

Bond Bond prices, according to finance theory, reveal market expectations of the probability of default and recovery rates—that is, the value of what bondholders would receive after default and restructuring.225 Once the prospect of default became a certainty, bond prices then reflected market expectations of recovery rates. Appendix B presents data on bond prices and trading volumes for a narrower time period. Appendix C lists key dates with links to key documents. Bond prices have changed dramatically over the course of the debt restructuring process. prices have changed dramatically over the course of the debt restructuring process.~~205~~226 Many Many
Puerto Rican bonds traded above par before mid-2013. Puerto Rican bonds traded above par before mid-2013. Al All of these bond prices of these bond prices ~~fel~~ fell sharply in sharply in
2013, reacting to the Detroit bankruptcy filing and a business press article on Puerto Rico’s fiscal 2013, reacting to the Detroit bankruptcy filing and a business press article on Puerto Rico’s fiscal
distress.distress.~~206~~227 The introduction of a local bankruptcy measure in June 2014 and the announcement The introduction of a local bankruptcy measure in June 2014 and the announcement
by Puerto Rico’s governor a year later that the island’s debts were “unpayable” also pushed bond by Puerto Rico’s governor a year later that the island’s debts were “unpayable” also pushed bond
prices down. prices down.
Not Not al all categories of debt moved to the same extent. For instance, COFINA subordinate bond categories of debt moved to the same extent. For instance, COFINA subordinate bond
prices reacted more sharply to events of 2015 than GO bond prices, although they recovered more prices reacted more sharply to events of 2015 than GO bond prices, although they recovered more
ground than other bonds in the lead-up to the enactment of PROMESA at the end of June 2016. ground than other bonds in the lead-up to the enactment of PROMESA at the end of June 2016.
The COFINA default in May 2017 depressed senior and The COFINA default in May 2017 depressed senior and ~~especial y~~especially subordinate COFINA bonds. subordinate COFINA bonds.
The devastation left by Hurricanes Irma and María in September 2017 severely depressed almost The devastation left by Hurricanes Irma and María in September 2017 severely depressed almost
al all Puerto Rico bond prices.Puerto Rico bond prices.~~207~~228 GO bonds then traded at a quarter of par or less, while COFINA GO bonds then traded at a quarter of par or less, while COFINA
subordinates briefly traded at about 10% of par. Prices began to recover in 2018, with the subordinates briefly traded at about 10% of par. Prices began to recover in 2018, with the
February enactment of the Balanced Budget Act of 2018 (BBAFebruary enactment of the Balanced Budget Act of 2018 (BBA 2018; P.L. 115-123), which 2018; P.L. 115-123), which
appropriated disaster relief funds for Puerto Rico and other affected areas. Prices also responded appropriated disaster relief funds for Puerto Rico and other affected areas. Prices also responded
to Oversight Board proposals in Aprilto Oversight Board proposals in April 2018 that combined 2018 that combined ~~cal s~~calls for fiscal austerity with relatively for fiscal austerity with relatively
optimistic macroeconomic forecasts. optimistic macroeconomic forecasts.
In January 2018, the Oversight Board In January 2018, the Oversight Board ~~cal ed~~called for invalidating late vintage GO issues, causing the for invalidating late vintage GO issues, causing the
older GOs to trade at a premium to the 2014 issue. The 2014 GO issue had traded above older GO older GOs to trade at a premium to the 2014 issue. The 2014 GO issue had traded above older GO
issues until Hurricane María, reflecting the New York law provision. Some of the issues until Hurricane María, reflecting the New York law provision. Some of the ~~al egations~~allegations of of
insider trading—discussed in insider trading—discussed in “Accusations of Insider Trading in the GO Restructuring Process,,” ”
above—center on divergences between earlier and late vintage GO bonds. Those differences above—center on divergences between earlier and late vintage GO bonds. Those differences
narrowed after the Oversight Board announced an Amended Plan Support Agreement for the narrowed after the Oversight Board announced an Amended Plan Support Agreement for the
CPR, ERS, and PBACPR, ERS, and PBA in February 2020. in February 2020.
The relationship between bond prices and estimated recovery rates in the consummated COFINA The relationship between bond prices and estimated recovery rates in the consummated COFINA
plan and plan and ~~recent proposals~~the plan support agreements for restructuring GO and related debts has attracted some attention. for restructuring GO and related debts has attracted some attention.
Several activists assert that the marked recovery of bond prices after some of those prices reached Several activists assert that the marked recovery of bond prices after some of those prices reached
extremely low levels in extremely low levels in ~~fal~~ fall 2017 implies that investors took advantage of island residents. The 2017 implies that investors took advantage of island residents. The
recovery of those prices, per se, need not imply any misbehavior on the part of investors, but recovery of those prices, per se, need not imply any misbehavior on the part of investors, but
could reflect a transfer of bond holdings to investors and funds more could reflect a transfer of bond holdings to investors and funds more ~~wil ing~~willing to tolerate risk, or to tolerate risk, or
less adverse to litigation, or better informed about long-term prospects. less adverse to litigation, or better informed about long-term prospects.
~~The shift in holdings from smal er bondholders to hedge funds acting within coalitions may also~~
~~play a role. Hedge funds, some contend, can serve to mitigate collection action chal enges to~~
~~enforcing creditor interests facing dispersed investors.208~~
~~What Can Puerto Rico Afford to Pay?~~
~~A “once and done deal,” as the Oversight Board chair put it, would require a manageable future~~
~~debt service burden. Capacity to service public debt depends on growth in the tax base—largely~~

~~205 More specific allegations of insider trading are discussed in a previous section.~~
~~206 Andrew Bary, “T roubling Winds: Puerto Rico’s Huge Debt Could Overwhelm Attempts to Revive its Economy,”~~
Barron’s, August 26, 2013.
~~207 PRASA, the water and sewer authority, was the exception, reflecting its comparatively stronger finances.~~
~~208 Marcel Kahan and Edward Rock, “Hedge Fund Activism in the Enforcement of Bondholder Rights,”~~ ~~Northwestern~~
~~University Law Review, vol. 103, no. 1 (winter 2009), pp. 281-322. T hose enhanced capacities to enforce bond~~
~~covenants, the authors note, may impair interests of issuers. Some COFINA creditors argued that actions of hedge~~
~~funds impaired their interests, but were unable to persuade courts to intervene.~~
~~Congressional Research Service~~

33

~~link to page 39~~ ~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~proxied by growth of the island’s economy—as wel as the efficiency of tax administration and~~
~~the wil ingness~~ 225 A risk-neutral investor would calculate a bond’s value as (1-α)*(present value of principal and interest payments) + α*(recovery value), where α is the probability of default. Given that default on the bulk of Puerto Rico’s debt was highly likely or certain by mid-2015, bond prices would then directly reflect market expectations of recovery rates. Holders of some bonds backed by dedicated revenue streams have argued that default on those bonds was not inevitable, although such arguments gained no traction in the Title III court. 226 More specific allegations of insider trading are discussed in a previous section. 227 Andrew Bary, “Troubling Winds: Puerto Rico’s Huge Debt Could Overwhelm Attempts to Revive its Economy,” Barron’s, August 26, 2013. 228 PRASA, the water and sewer authority, was the exception, reflecting its comparatively stronger finances. Congressional Research Service 36 link to page 40 link to page 40 link to page 43 Puerto Rico’s Public Debts: Accumulation and Restructuring Bond prices after confirmation of the CPR plan of adjustment in January 2022, as noted above, suggest a market assessment that the plan delivered high recovery rates for many GO bonds. All GO bonds shown in Figure 4 had prices near 90% of par in February 2022. The Highway and Transportation Authority (HTA) shown in Figure 4 traded above par since spring 2021. Negotiations over the restructuring of PREPA debt remain in progress. Market pricing data suggest that investors anticipate a high recovery rate for PREPA bonds as well. The shift in holdings from smaller bondholders to hedge funds acting within coalitions may also play a role. Hedge funds, some contend, can serve to mitigate collection action challenges to enforcing creditor interests facing dispersed investors.229 The leverage hedge funds can bring to bear in complex negotiations may also result in dissimilar treatment for different classes of investors. What Can Puerto Rico Afford to Pay? A “once and done deal,” as the Oversight Board chair put it, would require a manageable future debt service burden. Capacity to service public debt depends on growth in the tax base—largely proxied by growth of the island’s economy—as well as the efficiency of tax administration and the willingness to keep tax rates in proportion to expenditures. In other terms, debt service to keep tax rates in proportion to expenditures. In other terms, debt service
capacity rests on a government’s ability to run primary surpluses; that is, having receipts running capacity rests on a government’s ability to run primary surpluses; that is, having receipts running
sufficiently above non-debt-service outlays to meet debt service obligations. For each component sufficiently above non-debt-service outlays to meet debt service obligations. For each component
of debt service capacity—economic growth, tax administration, of debt service capacity—economic growth, tax administration, ~~wil ingness~~willingness to tax, and fiscal to tax, and fiscal
constraint—reasons for both optimism and concern may exist. constraint—reasons for both optimism and concern may exist.
Puerto Rico’s Economy Expected to Shrink
In recent decades economic growth in Puerto Rico has been uneven, if not stagnant.In recent decades economic growth in Puerto Rico has been uneven, if not stagnant.~~209~~230 Recovery Recovery
from the 2017 Hurricanes Irma and María has been slow. Earthquakes in late 2019 and early from the 2017 Hurricanes Irma and María has been slow. Earthquakes in late 2019 and early
2020, along with the COVID-19 pandemic, also hindered economic activity. The island’s 2020, along with the COVID-19 pandemic, also hindered economic activity. The island’s
economy, according to April 2021 Oversight Board estimates, shrank by 3.0% in 2020.economy, according to April 2021 Oversight Board estimates, shrank by 3.0% in 2020.~~210~~231
The Board projects negligible economic growth over the next five years, as shown The Board projects negligible economic growth over the next five years, as shown inin Figure 5.~~211~~232
The 2021 CPR Fiscal Plan projects somewhat more growth than plans from recent past years. The 2021 CPR Fiscal Plan projects somewhat more growth than plans from recent past years.
Growth projections that adjust for income increases due to federal COVID-19 relief measures Growth projections that adjust for income increases due to federal COVID-19 relief measures
show stronger growth in 2021 (3.8%) and 2022 (1.5%), but weaker growth for later years. Puerto show stronger growth in 2021 (3.8%) and 2022 (1.5%), but weaker growth for later years. Puerto
Rico’s projected economic growth trajectory, according to Oversight Board projections, Rico’s projected economic growth trajectory, according to Oversight Board projections, ~~wil be~~
~~wel~~ will be well below growth rates expected for the U.S. economy for the years 2021-2024, although it below growth rates expected for the U.S. economy for the years 2021-2024, although it
would nearly match the projected U.S. growth rate in 2025. would nearly match the projected U.S. growth rate in 2025.

~~209 See CRS~~ 229 Marcel Kahan and Edward Rock, “Hedge Fund Activism in the Enforcement of Bondholder Rights,” Northwestern University Law Review, vol. 103, no. 1 (winter 2009), pp. 281-322. Those enhanced capacities to enforce bond covenants, the authors note, may impair interests of issuers. Some COFINA creditors argued that actions of hedge funds impaired their interests, but were unable to persuade courts to intervene. 230 See CRS Report R44095, Report R44095, Puerto Rico’s Current Fiscal Challenges, by D. Andrew, by D. Andrew Austin. Austin.
~~210~~231 Oversight Board, Oversight Board, Certified Fiscal Plan for Puerto Rico, April 23, 2021, ch. 4, https://drive.google.com/file/d/, April 23, 2021, ch. 4, https://drive.google.com/file/d/
1reetKnfKsa1uR-A0u9l3FM6PfGamHCrx/view. Growth is1reetKnfKsa1uR-A0u9l3FM6PfGamHCrx/view. Growth is ~~measured~~ measured for fiscal years of the Puerto Rican government, for fiscal years of the Puerto Rican government,
which start on July 1. Economic growth iswhich start on July 1. Economic growth is ~~measured using~~ measured using gross national product, which avoids distortions due to profit gross national product, which avoids distortions due to profit
shifting. shifting.
~~211 T estimony~~ 232 Testimony of Oversight Board Executive Director Natalie Jaresko, in U.S. of Oversight Board Executive Director Natalie Jaresko, in U.S. Congress, HouseCongress, House Natural Resources Natural Resources
Committee, 116th Cong., 2nd sess., hearing, Committee, 116th Cong., 2nd sess., hearing, PROMESA ~~Im plem entation During the Co ronavirus Pandem ic~~Implementation During the Coronavirus Pandemic, June 11, , June 11,
2020, p. 10, https://www.govinfo.gov/content/pkg/CHRG-116hhrg40637/pdf/CHRG-116hhrg40637.pdf. 2020, p. 10, https://www.govinfo.gov/content/pkg/CHRG-116hhrg40637/pdf/CHRG-116hhrg40637.pdf.
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Figure 5. Projected Puerto Rican and U.S. Economic Growth Rates, 2020-2025

Source: Oversight Board, Oversight Board, Fiscal Plan Macroeconomic Overview and Fiscal Plan, August 18, 2020; and Oversight , August 18, 2020; and Oversight
Board, Board, Certified 2021 Fiscal Plan, April, April 23, 2021. 23, 2021.
Notes: Puerto Rico projections use GNP, which avoids distortions in GDP measures Puerto Rico projections use GNP, which avoids distortions in GDP measures related to tax avoidance related to tax avoidance
strategiesstrategies of multinational firms with Puerto Rican subsidiaries.of multinational firms with Puerto Rican subsidiaries. Puerto Rican growth rates are for the CPR fiscal Puerto Rican growth rates are for the CPR fiscal
year, which starts on July 1. year, which starts on July 1.
The 2021 CPR Fiscal Plan anticipates that Puerto Rico The 2021 CPR Fiscal Plan anticipates that Puerto Rico ~~wil~~ will receive $110 receive $110 ~~bil ion~~ billion in federal funds in federal funds
over the coming decade, although mainland firms or contractors would receive some of that over the coming decade, although mainland firms or contractors would receive some of that
amount. Federal and private disaster assistance is estimated to drop from $8.1 amount. Federal and private disaster assistance is estimated to drop from $8.1 ~~bil ion~~billion in 2019 to in 2019 to
$2.3 $2.3 ~~bil ion~~ billion in 2020, and to rise in following years as Community Development Block Grant in 2020, and to rise in following years as Community Development Block Grant
Disaster Recovery (CDBG-DR), Federal Emergency Management Agency (FEMA) permanent Disaster Recovery (CDBG-DR), Federal Emergency Management Agency (FEMA) permanent
public assistance, and certain other federal program funds are disbursed.public assistance, and certain other federal program funds are disbursed.~~212~~
233 The island’s shrinking population, due to continuing net outmigration to the mainland and low The island’s shrinking population, due to continuing net outmigration to the mainland and low
birth rates, also affects its growth prospects.birth rates, also affects its growth prospects.~~213~~234 The U.S. Census Bureau estimates that the island’s The U.S. Census Bureau estimates that the island’s
population population ~~fel~~ fell from 3.73 from 3.73 ~~mil ion~~million in 2010 to 3.16 in 2010 to 3.16 ~~mil ion~~ million in 2020, a decrease of 15%.in 2020, a decrease of 15%.~~214~~235 The The
Oversight Board projects that its population Oversight Board projects that its population ~~wil~~ will decline to 2.76 decline to 2.76 ~~mil ion~~million by 2026.236 233 ~~by 2026.215~~

~~212~~ Oversight Board, Oversight Board, Certified Fiscal Plan for Puerto Rico, April 23, 2021, ch. 4, exhibits 12, 13, 14, pp. 31, April 23, 2021, ch. 4, exhibits 12, 13, 14, pp. 31 -39, -39,
https://drive.google.com/file/d/1reetKnfKsa1uR-A0u9l3FM6PfGamHCrx/view. Also see Sergiohttps://drive.google.com/file/d/1reetKnfKsa1uR-A0u9l3FM6PfGamHCrx/view. Also see Sergio M. Marxuach, M. Marxuach,
“Federal Funds“Federal Funds Anchor New FiscalAnchor New Fiscal Plan,” Center for a NewPlan,” Center for a New Economy blog, April 29, 2021, https://grupocne.org/2021/Economy blog, April 29, 2021, https://grupocne.org/2021/
04/29/federal-funds-anchor-new-fiscal-plan/. 04/29/federal-funds-anchor-new-fiscal-plan/.
~~213~~234 Jennifer Hinojosa and Edwin Jennifer Hinojosa and Edwin Meléndez, Meléndez, Puerto Rican Exodus: One Year Since Hurricane Maria, Hunter College , Hunter College
Center for Puerto Rican Studies,Center for Puerto Rican Studies, ~~issue~~ issue brief RB2018-05, September 2018, https://centropr.hunter.cuny.edu/sites/default/brief RB2018-05, September 2018, https://centropr.hunter.cuny.edu/sites/default/
files/RB2018-files/RB2018-~~05_SEPT 2018~~05_SEPT2018%20%281%29.pdf. %20%281%29.pdf.
~~214 U.S. Census Bureau,~~ 235 U.S. Census Bureau, Puerto Rico Municipios Population Totals: 2010-2020, April 30, 2021, , April 30, 2021,
https://www.census.gov/programs-surveys/popest/technical-documentation/research/evaluation-estimates/2020-https://www.census.gov/programs-surveys/popest/technical-documentation/research/evaluation-estimates/2020-
evaluation-estimates/2010s-total-puerto-rico-municipios.html. evaluation-estimates/2010s-total-puerto-rico-municipios.html.
~~215~~236 Oversight Board, Oversight Board, Certified Fiscal Plan for Puerto Rico, April 23, 2021, ch. 4, exhibit 17, p. 42, , April 23, 2021, ch. 4, exhibit 17, p. 42,
https://drive.google.com/file/d/1reetKnfKsa1uR-A0u9l3FM6PfGamHCrx/view. https://drive.google.com/file/d/1reetKnfKsa1uR-A0u9l3FM6PfGamHCrx/view.
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The FOMB has been optimistic that structural reforms, such as changes in the island’s labor laws The FOMB has been optimistic that structural reforms, such as changes in the island’s labor laws
to encourage higher labor participation rates and to loosen employment law restrictions and to encourage higher labor participation rates and to loosen employment law restrictions and
protections, would accelerate economic growth.protections, would accelerate economic growth.~~216~~237
Some economists have viewed Oversight Board projections of Puerto Rico’s growth prospects Some economists have viewed Oversight Board projections of Puerto Rico’s growth prospects
and its capacity to service debt as overly and its capacity to service debt as overly ~~optimistic217~~optimistic238 and note that fiscal austerity could restrain and note that fiscal austerity could restrain
economic growth enough to outweigh gains from proposed structural and labor market reforms.economic growth enough to outweigh gains from proposed structural and labor market reforms.~~218~~239
Although low labor participation rates have been a persistent issue in Puerto Rico,Although low labor participation rates have been a persistent issue in Puerto Rico,~~219~~240 recent IMF recent IMF
research suggests projections of faster economic growth through structural changes are often research suggests projections of faster economic growth through structural changes are often
~~unfulfil ed.220~~unfulfilled.241
Effects of the 2017 hurricanes, the 2020 earthquakes, and the COVID-19 pandemic Effects of the 2017 hurricanes, the 2020 earthquakes, and the COVID-19 pandemic al all complicate complicate
the island’s fiscal prospects. Despite the catastrophic damage endured by the island, Executive the island’s fiscal prospects. Despite the catastrophic damage endured by the island, Executive
Director Jaresko stated that federal disaster recovery funds and insurance proceeds would Director Jaresko stated that federal disaster recovery funds and insurance proceeds would
promote economic growth and raise tax collections, which would increase Puerto Rico’s ability to promote economic growth and raise tax collections, which would increase Puerto Rico’s ability to
repay its debt,repay its debt,~~221~~242 in particular through the rebuilding of the island’s electric grid and generating in particular through the rebuilding of the island’s electric grid and generating
fleet, in part to be supported through Community Development Block Grant disaster recovery fleet, in part to be supported through Community Development Block Grant disaster recovery
funds. Federal outlays on permanent disaster recovery projects had been slow relative to mainland funds. Federal outlays on permanent disaster recovery projects had been slow relative to mainland
standards, although the Biden Administration has lifted holds on those funds.standards, although the Biden Administration has lifted holds on those funds.~~222~~243 Restructuring of Restructuring of

~~216 FOMB~~ 237 FOMB letter to Members of Congress, November 14, 2018, https://drive.google.com/file/d/letter to Members of Congress, November 14, 2018, https://drive.google.com/file/d/~~10BKVqq_YhKNT _~~10BKVqq_YhKNT_--
tGAEaphk1QhDiy3mSX/view. tGAEaphk1QhDiy3mSX/view.
~~217~~238 Pablo Gluzmann Pablo Gluzmann and Martin Guzman, and Martin Guzman, Puerto Rico’s Debt Dilemma, Espacios Abiertos working paper, May 2019, , Espacios Abiertos working paper, May 2019,
http://espaciosabiertos.org/wp-content/uploads/Puerto-Ricos-Debthttp://espaciosabiertos.org/wp-content/uploads/Puerto-Ricos-Debt -Dilemma-Final-Report-Dilemma-Final-Report -May-2019.pdf; and Omaya -May-2019.pdf; and Omaya
~~Sosa~~ Sosa Pascual and LuisPascual and Luis Valentín Ortiz, “Fantasy of the Fiscal Plan for Puerto Rico,” Center for Valentín Ortiz, “Fantasy of the Fiscal Plan for Puerto Rico,” Center for ~~Invest igative~~Investigative Journalism, Journalism,
February 20, 2018, https://periodismoinvestigativo.com/2018/02/the-fantasy-of-the-fiscal-plan-for-puerto-rico/. February 20, 2018, https://periodismoinvestigativo.com/2018/02/the-fantasy-of-the-fiscal-plan-for-puerto-rico/.
~~218~~239 Pablo A. Gluzmann, Martin M. Guzman, and Joseph E. Stiglitz, Pablo A. Gluzmann, Martin M. Guzman, and Joseph E. Stiglitz, An Analysis of Puerto Rico’s Debt Relief Needs to
Restore Debt Sustainability, National Bureau of Economic Research, working paper no. 25256, November 2018, , National Bureau of Economic Research, working paper no. 25256, November 2018,
http://www.nber.org/papers/w25256. Also seehttp://www.nber.org/papers/w25256. Also see Brad W. Setser, “Brad W. Setser, “ Could Maria’s Legacy Be a NewCould Maria’s Legacy Be a New Debt Debt ~~T rap~~Trap for Puerto for Puerto
Rico?” Council on Foreign Relations blog post, November 13, 2018, https://www.cfr.org/blog/could-marias-legacy-be-Rico?” Council on Foreign Relations blog post, November 13, 2018, https://www.cfr.org/blog/could-marias-legacy-be-
new-debt-trap-puerto-rico. new-debt-trap-puerto-rico.
~~219~~240 María E. Enchautegui and Richard María E. Enchautegui and Richard B. Freeman, “Why Don’t More Puerto Rican Men Work?: B. Freeman, “Why Don’t More Puerto Rican Men Work?: ~~T he~~The Rich Uncle (Sam) Rich Uncle (Sam)
Hypothesis,” in SusanHypothesis,” in Susan M. Collins, Barry P. Bosworth, and MiguelM. Collins, Barry P. Bosworth, and Miguel A. Soto-Class, eds.,A. Soto-Class, eds., ~~The Econom y~~ The Economy of Puerto Rico:
Restoring Growth (Brookings: Washington, DC, 2006). (Brookings: Washington, DC, 2006).
~~220~~241 Kevin Greenidge, Kevin Greenidge, Meredith A. McIntyre, and Hanlei Yun, Meredith A. McIntyre, and Hanlei Yun, Structural Reform and Growth: What Really Matters:
Evidence from the Caribbean, International Monetary Fund, working paper 16/82, April 7, 2016, https://www.imf.org/, International Monetary Fund, working paper 16/82, April 7, 2016, https://www.imf.org/
en/Publications/WP/Issues/2016/12/31/Structural-Reform-and-Growth-What-Really-Matters-Evidence-from-the-en/Publications/WP/Issues/2016/12/31/Structural-Reform-and-Growth-What-Really-Matters-Evidence-from-the-
Caribbean-43855. Caribbean-43855. ~~T hose~~Those authors find that, among Caribbean countries, structural reforms only appear in the long term authors find that, among Caribbean countries, structural reforms only appear in the long term
and depend on investments in institutional qualityand depend on investments in institutional quality that support the maintenance of reform efforts. that support the maintenance of reform efforts. ~~T he~~The IMF chief IMF chief
economist said “it was strongly felt that if you have sufficiently flexible laboureconomist said “it was strongly felt that if you have sufficiently flexible labour markets and product markets, labour markets and product markets, labour
and capital willand capital will move freely to wherever you have the highest wagesmove freely to wherever you have the highest wages or the highest returns. But the truth is that doesn’t or the highest returns. But the truth is that doesn’t
happen very easily, especially when you’re talking about labourhappen very easily, especially when you’re talking about labour mobility.” Martin Sandbu,mobility.” Martin Sandbu, “Gita Gopinath: ‘Fiscal “Gita Gopinath: ‘Fiscal
Policy Plays an Essential Role in Recovery,’” Policy Plays an Essential Role in Recovery,’” Financial ~~Tim es~~Times, November 19, 2020. , November 19, 2020.
~~221 “T he~~ 242 “The fiscal stimulus from the Federal disaster recovery funds and the insurance proceeds has the impact of increased fiscal stimulus from the Federal disaster recovery funds and the insurance proceeds has the impact of increased
economic growth that translates into more tax revenues for the Commonwealth. While no Federal monies are being economic growth that translates into more tax revenues for the Commonwealth. While no Federal monies are being
usedused to pay debt, the to pay debt, the ~~Commonwealt h~~Commonwealth’s new reality is that the Government will collect more revenue during’s new reality is that the Government will collect more revenue during the period the period
of the Fiscal Plan.” of the Fiscal Plan.” ~~T estimony~~Testimony of Executive Director Natalie Jaresko of Executive Director Natalie Jaresko , in U.S. Congress,, in U.S. Congress, House Committee on Natural House Committee on Natural
Resources,Resources, Oversight Hearing on PROMESA,Oversight Hearing on PROMESA, ~~116 th~~ 116th Cong., 1st sess., May 2, 2019, written response to Rep. Horsford’s Cong., 1st sess., May 2, 2019, written response to Rep. Horsford’s
question 13, Ser. 116-14, https://www.govinfo.gov/content/pkg/CHRG-116hhrg36258/html/CHRG-116hhrg36258.htm. question 13, Ser. 116-14, https://www.govinfo.gov/content/pkg/CHRG-116hhrg36258/html/CHRG-116hhrg36258.htm.
~~222~~243 U.S. U.S. Department of Housing and Urban Development (HUD), “HUD Accelerates Access to Puerto Rico Disaster Department of Housing and Urban Development (HUD), “HUD Accelerates Access to Puerto Rico Disaster
Relief Funds:Relief Funds: Department Removes Onerous Restrictions that Limited Island’s Access to Funds,Department Removes Onerous Restrictions that Limited Island’s Access to Funds, ~~Obligates~~ Obligates $8.2 Billion $8.2 Billion
in Federal Mitigation Funding,”in Federal Mitigation Funding,” press releasepress release 21-066, April 19, 2021, https://www.hud.gov/press/21-066, April 19, 2021, https://www.hud.gov/press/
press_releases_media_advisories/HUD_No_21_066. Also see HUD Office of the Inspector General, press_releases_media_advisories/HUD_No_21_066. Also see HUD Office of the Inspector General, Review of HUD’s
~~Disbursem ent~~Disbursement of Grant Funds Appropriated for Disaster Recovery and Mitigation Activities in Puerto Rico , report , report
2019SU008945I, April 20, 2021, https://www.hudoig.gov/reports-publications/investigation-summary/review-huds-2019SU008945I, April 20, 2021, https://www.hudoig.gov/reports-publications/investigation-summary/review-huds-
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Puerto Rico’s energy sector, however, is subject to substantial implementation, operational, and Puerto Rico’s energy sector, however, is subject to substantial implementation, operational, and
financial risks.financial risks.~~223~~244
Contingent valuation instruments (CVIs) added into the amended plan of adjustment proposed by Contingent valuation instruments (CVIs) added into the amended plan of adjustment proposed by
the Oversight Board in February 2021, if implemented, would provide creditors with additional the Oversight Board in February 2021, if implemented, would provide creditors with additional
payments if Puerto Rico’s economy grew faster than the Board’s projections. payments if Puerto Rico’s economy grew faster than the Board’s projections.
Revenue Growth and Tax Policy
Recent tax collections have exceeded projections. CPR-source revenue rose from $10.1 Recent tax collections have exceeded projections. CPR-source revenue rose from $10.1 ~~bil ion~~billion in in
FY2018 to a projected $12.3 FY2018 to a projected $12.3 ~~bil ion~~billion in FY2019. Federal-source income also rose by $3.6 in FY2019. Federal-source income also rose by $3.6 ~~bil ion~~billion
between those years.between those years.~~224~~245 Revenues for the last half of calendar 2020 were stronger than Revenues for the last half of calendar 2020 were stronger than
expected.expected.~~225~~246
Other concerns persist. Recent changes in federal tax laws regarding treatment of Other concerns persist. Recent changes in federal tax laws regarding treatment of ~~intel ectual~~intellectual
property and corporate taxation could present property and corporate taxation could present ~~chal enges~~challenges to Puerto Rico’s economic development to Puerto Rico’s economic development
strategies, which strategies, which ~~historical y~~historically have relied heavily on advantageous tax treatment of corporate have relied heavily on advantageous tax treatment of corporate
income.income.~~226~~247 Those tax incentives have led some to term Puerto Rico a tax haven. Those tax incentives have led some to term Puerto Rico a tax haven.~~227~~248 In July 2019, In July 2019,
Puerto Rico enacted a law that consolidated many of its tax incentives.Puerto Rico enacted a law that consolidated many of its tax incentives.~~228~~249 The Oversight Board The Oversight Board
has expressed concerns about how the CPR has awarded tax credits and incentives.has expressed concerns about how the CPR has awarded tax credits and incentives.~~229~~250 The Puerto The Puerto
Rico Treasury Department has promised to tighten controls on tax fraud.Rico Treasury Department has promised to tighten controls on tax fraud.~~230~~251
About one-fifth of the CPR’s revenue stems from Act 154 taxes on transactions between About one-fifth of the CPR’s revenue stems from Act 154 taxes on transactions between
multinationalmultinational corporation subsidiaries based in Puerto Rico and the mainland, which often can be corporation subsidiaries based in Puerto Rico and the mainland, which often can be
credited against federal tax liabilities.credited against federal tax liabilities. In September 2019, then-Treasury Secretary Mnuchin had In September 2019, then-Treasury Secretary Mnuchin had
pushed to phase out Act 154 taxes.pushed to phase out Act 154 taxes.~~231~~

~~disbursement -grant~~ 252 disbursement-grant-funds-appropriated. -funds-appropriated.
~~223 See CRS~~ 244 See CRS Report R45023, Report R45023, Repair or Rebuild: Options for Electric Power in Puerto Rico, by Richard J. Campbell, , by Richard J. Campbell,
Corrie E. Clark, and D. AndrewCorrie E. Clark, and D. Andrew Austin. Austin.
~~224~~245 Puerto Rico Planning Board, Statistical Appendix to the FY2019 Economic Report of the Governor (Apéndice Puerto Rico Planning Board, Statistical Appendix to the FY2019 Economic Report of the Governor (Apéndice
Estadístico delEstadístico del Informe Económico a la Informe Económico a la ~~Gobernado r~~Gobernador), May 2020, ), May 2020, ~~T able~~Table 27, http://jp.pr.gov/Econom%C3%ADa/ 27, http://jp.pr.gov/Econom%C3%ADa/
Ap%C3%AAndice. Ap%C3%AAndice.
~~225~~ 246 Robert Slavin, Robert Slavin, “Puerto Rico Revenues Coming in Well Ahead of Projections,” “Puerto Rico Revenues Coming in Well Ahead of Projections,” Bond Buyer, February 18, 2021. , February 18, 2021.
~~226~~247 Manuel Madrid, Manuel Madrid, “How the “How the ~~T ax~~Tax Cut Sacks Cut Sacks Puerto Rico,” Puerto Rico,” American Prospect, June 28, 2018, http://prospect.org/, June 28, 2018, http://prospect.org/
article/how-tax-cut-sacks-puerto-rico. Also see Francisco Luis, “article/how-tax-cut-sacks-puerto-rico. Also see Francisco Luis, “ Acts 20 & 22 Interplay With New U.S.Acts 20 & 22 Interplay With New U.S. ~~T ax~~ Tax Reform Reform ,” ,”
Caribbean Business, February 8, 2018. , February 8, 2018.
~~227~~ 248 Abner Dennis, “ Abner Dennis, “ ~~A T ax~~A Tax Haven Called Haven Called Puerto Rico,” Little Sis, FebruaryPuerto Rico,” Little Sis, February 19, 2020, https://news.littlesis.org/2020/02/19, 2020, https://news.littlesis.org/2020/02/
19/a-tax-haven-called-puerto-rico/. Also see Jesse19/a-tax-haven-called-puerto-rico/. Also see Jesse Barron, “Barron, “ How Puerto Rico Became the Newest How Puerto Rico Became the Newest ~~T ax~~Tax Haven for the Haven for the
SuperSuper Rich,” Rich,” GQ, September 18, 2018, https://www.gq.com/story/how-puerto-rico-became-tax-haven-for-super-rich. , September 18, 2018, https://www.gq.com/story/how-puerto-rico-became-tax-haven-for-super-rich.
Also see Also see ~~T estimony~~Testimony of Miriam J. Ramirez, former Puerto Rico Senator, in U.S. of Miriam J. Ramirez, former Puerto Rico Senator, in U.S. Congress, HouseCongress, House Committee on Natural Committee on Natural
Resources,Resources, Subcommittee on Indian, Insular and Subcommittee on Indian, Insular and ~~Alask a~~Alaska Native Affairs, Native Affairs, ~~Exam ining~~Examining Procedures Regarding Puerto
Rico’s Political Status and Economic Outlook, Oversight hearing, 114th Cong., 1st sess.,, Oversight hearing, 114th Cong., 1st sess., June 24, 2015, Ser. 114-13, June 24, 2015, Ser. 114-13,
https://www.govinfo.gov/content/pkg/CHRG-114hhrg95300/html/CHRG-114hhrg95300.htm. https://www.govinfo.gov/content/pkg/CHRG-114hhrg95300/html/CHRG-114hhrg95300.htm.
~~228~~249 Act 60 of 2019, July 1, 2019, http://www.lexjuris.com/lexlex/Leyes2019/lexl2019060.htm. Act 60 of 2019, July 1, 2019, http://www.lexjuris.com/lexlex/Leyes2019/lexl2019060.htm.
~~229~~250 Oversight Board, letter to Oversight Board, letter to ~~T reasury Secretary T eresita~~Treasury Secretary Teresita Fuentes Marimón and Secretary for Economic Development Fuentes Marimón and Secretary for Economic Development
and Commerce Manuel Laboy River, October 31, 2018, ahttps://drive.google.com/file/d/and Commerce Manuel Laboy River, October 31, 2018, ahttps://drive.google.com/file/d/
1HWNVx0Ce6gkH4Ijy2YJfbbKtttz7MrvR/view. 1HWNVx0Ce6gkH4Ijy2YJfbbKtttz7MrvR/view.
~~230~~251 Robert Slavin, Robert Slavin, “Puerto Rico “Puerto Rico ~~T reasury~~Treasury Announces Crackdown on Announces Crackdown on ~~T ax~~Tax Fraud,” Fraud,” Bond Buyer, February 22, 2021. , February 22, 2021.
~~231~~252 Robert Slavin, Robert Slavin, “Puerto Rico Will Lose Federal“Puerto Rico Will Lose Federal ~~T ax~~ Tax Credits that Support 18% of Revenue,” Credits that Support 18% of Revenue,” Bond Buyer, September , September
12, 2019. 12, 2019.
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Comparison with Heavily Indebted States
A comparison with per capita debt levels of state governments is one benchmark of Puerto Rico’s A comparison with per capita debt levels of state governments is one benchmark of Puerto Rico’s
capacity to repay debt. Puerto Rico’s post-restructuring public debts—if recent plans and capacity to repay debt. Puerto Rico’s post-restructuring public debts—if recent plans and
proposals go through—would leave it with per capita debt burdens somewhat above the most proposals go through—would leave it with per capita debt burdens somewhat above the most
highly indebted state governments. Puerto Rico’s per capita income levels, however, are highly indebted state governments. Puerto Rico’s per capita income levels, however, are ~~wel~~
well below those of mainland states.below those of mainland states.~~232~~253 The Oversight Board, in a presentation outlining its March The Oversight Board, in a presentation outlining its March
2021 restructuring plan, contends that those proposals would significantly reduce Puerto Rico’s 2021 restructuring plan, contends that those proposals would significantly reduce Puerto Rico’s
public debt in comparison to the most heavily indebted mainland states.public debt in comparison to the most heavily indebted mainland states.~~233~~254
Issues for Congress
Puerto Rico’s debt restructuring processes may present policy issues concerning not only the Puerto Rico’s debt restructuring processes may present policy issues concerning not only the
island, its debts, and its creditors, but also municipal finance markets more broadly. Congress island, its debts, and its creditors, but also municipal finance markets more broadly. Congress
therefore might consider legislative and oversight initiativestherefore might consider legislative and oversight initiatives focused not only on Puerto Rico, but focused not only on Puerto Rico, but
also on the wider municipal securities market. also on the wider municipal securities market.
As Puerto Rico’s public debt comprises about 2% of As Puerto Rico’s public debt comprises about 2% of ~~overal~~ overall municipal debt, the consequences of municipal debt, the consequences of
debt restructurings debt restructurings ~~wil~~ will affect or have affected a significant number of investors. Many investors affect or have affected a significant number of investors. Many investors
held Puerto Rican public debt through mutual funds, which held Puerto Rican public debt through mutual funds, which ~~general y~~generally bought bonds near or at par bought bonds near or at par
when issued, and then were left with realized losses after those funds sold off those holdings.when issued, and then were left with realized losses after those funds sold off those holdings.~~234~~255
Judicial decisions in Puerto Rico cases could shape case law, thus affecting the future disposition Judicial decisions in Puerto Rico cases could shape case law, thus affecting the future disposition
of mainland municipal debtors. of mainland municipal debtors.
In the case of Puerto Rico, issues with federal tax exemptions, In the case of Puerto Rico, issues with federal tax exemptions, ~~al eged~~alleged violations of securities violations of securities
laws, and the interpretation of provisions of the Bankruptcy Code incorporated into PROMESA laws, and the interpretation of provisions of the Bankruptcy Code incorporated into PROMESA
Titles III and VI may provide lessons for policymakers. Titles III and VI may provide lessons for policymakers.
More More ~~general y~~generally, many have complained that the restructuring process has taken too long to , many have complained that the restructuring process has taken too long to
complete.complete.~~235~~256 Moreover, the costs of litigation, which the Oversight Board has Moreover, the costs of litigation, which the Oversight Board has ~~cal ed~~called
“extraordinarily expensive,” have been higher than expected.“extraordinarily expensive,” have been higher than expected.~~236~~257 Costs of the Oversight Board’s Costs of the Oversight Board’s
operations and litigationoperations and litigation are borne by island taxpayers and residents.are borne by island taxpayers and residents.~~237~~258
Federalism and Municipal Debt Markets
The federal government has three main instruments to shape municipal bond markets: tax The federal government has three main instruments to shape municipal bond markets: tax
policies, securities laws, and bankruptcy laws. Requirements for exemptions from federal income policies, securities laws, and bankruptcy laws. Requirements for exemptions from federal income
taxation play a fundamental role in municipal finance because marketing bonds without that taxation play a fundamental role in municipal finance because marketing bonds without that

~~232 Brad Setser, “~~ 253 Brad Setser, “Is Puerto Rico Back on a Path Is Puerto Rico Back on a Path ~~T oward~~Toward Debt Sustainability?” Debt Sustainability?” Council on Foreign Relations blogCouncil on Foreign Relations blog post, post,
September 30, 2019, https://www.cfr.org/blog/puerto-rico-back-path-toward-debt-sustainability. Setser wasSeptember 30, 2019, https://www.cfr.org/blog/puerto-rico-back-path-toward-debt-sustainability. Setser was a U.S. a U.S.
~~T reasury~~Treasury official involved in discussions official involved in discussions ~~leading~~ leading up to enactment of PROMESA. up to enactment of PROMESA.
~~233~~254 Oversight Board, “Lowering Puerto Rico’s Debt to Sustainable Oversight Board, “Lowering Puerto Rico’s Debt to Sustainable Levels: Plan Support Agreement with Bondholders,” Levels: Plan Support Agreement with Bondholders,”
February 26, 2021, p. 5, https://drive.google.com/file/d/February 26, 2021, p. 5, https://drive.google.com/file/d/~~1wT LXvJRu2GI38DRcpOWuVHX2OvT wvAVo/view.~~
~~234~~1wTLXvJRu2GI38DRcpOWuVHX2OvTwvAVo/view. 255 John Dizard, “‘Bottom-Feeding’ Hedge Funds John Dizard, “‘Bottom-Feeding’ Hedge Funds are Bigare Big Winners on Puerto Rico Bonds,”Winners on Puerto Rico Bonds,” Financial Times, November , November
9, 2018. 9, 2018.
~~235~~ 256 Robert Slavin, Robert Slavin, “Puerto Rico Bond Negotiations Slog“Puerto Rico Bond Negotiations Slog ~~T oward~~ Toward Seventh Year,” Seventh Year,” Bond Buyer, January 25, 2021. , January 25, 2021.
~~236~~257 Oversight Board, letter to congressional leaders, March 12, 2018, https://drive.google.com/file/d/ Oversight Board, letter to congressional leaders, March 12, 2018, https://drive.google.com/file/d/
~~17oP8ppSHFN9YbprGMkjT scVmnH_cDoo3~~ 17oP8ppSHFN9YbprGMkjTscVmnH_cDoo3/view?usp=drivesdk. /view?usp=drivesdk.
~~237~~258 PROMESA PROMESA §107, 48 U.S.C.§107, 48 U.S.C. §  §2127. 2127.
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exemption is more difficult. exemption is more difficult.~~238~~259 Securities laws that mandate disclosure requirements help Securities laws that mandate disclosure requirements help
investors make informed choices so that financial resources and risk-bearing can be investors make informed choices so that financial resources and risk-bearing can be ~~al ocated in~~
allocated in an efficient way. an efficient way.
The federal government, to a large extent, has exercised light oversight of municipal bond The federal government, to a large extent, has exercised light oversight of municipal bond
markets, which provide state and local governments with lower-cost access to capital to build markets, which provide state and local governments with lower-cost access to capital to build
roads, schools, public buildings, and water and sewer systems, among other ends, as roads, schools, public buildings, and water and sewer systems, among other ends, as ~~wel~~ well as to as to
help manage cash flows to match revenues and outlays.help manage cash flows to match revenues and outlays.~~239~~260 This reflects a division of This reflects a division of
responsibilities between the federal government and states, which have the flexibility to responsibilities between the federal government and states, which have the flexibility to
accommodate policies to local conditions. Congress, however, has greater authority to oversee accommodate policies to local conditions. Congress, however, has greater authority to oversee
territories through its Article IV powers.territories through its Article IV powers.
Great Depression-era securities laws were not considered to apply to municipal securities until Great Depression-era securities laws were not considered to apply to municipal securities until
the early 1970s, when questionable practices by some municipal finance specialty firms and New the early 1970s, when questionable practices by some municipal finance specialty firms and New
York City’s fiscal crisis prompted federal responses.York City’s fiscal crisis prompted federal responses.~~240~~261 The Securities Acts Amendments of 1975 The Securities Acts Amendments of 1975
(P.L. 94-29) extended the reach of federal regulations to the municipal securities market, (P.L. 94-29) extended the reach of federal regulations to the municipal securities market,
established the Municipal Securities Rulemaking Board (MSRB), and imposed certain antifraud established the Municipal Securities Rulemaking Board (MSRB), and imposed certain antifraud
provisions.provisions.~~241~~262 The act also included a provision known as the Tower Amendment that barred the The act also included a provision known as the Tower Amendment that barred the
MSRB and SEC from requiring that municipal issuers file pre-sale financial statements.MSRB and SEC from requiring that municipal issuers file pre-sale financial statements.~~242~~263 Some Some
have questioned those limits on federal regulation of municipal finance,have questioned those limits on federal regulation of municipal finance,~~243~~264 although others point although others point
to more active federal enforcement of disclosure violations.to more active federal enforcement of disclosure violations.~~244~~
265 A 2012 SEC report included some legislative A 2012 SEC report included some legislative proposals for enhancing disclosure in the municipal proposals for enhancing disclosure in the municipal
bond market, although it did not bond market, although it did not ~~cal~~ call for removing Tower Amendment restrictions.for removing Tower Amendment restrictions.~~245~~266 A 2020 SEC A 2020 SEC
advisory panel discussed various means to improve the timeliness and usefulness of disclosures, advisory panel discussed various means to improve the timeliness and usefulness of disclosures,
although some warned of imposing new disclosure requirements that would burden although some warned of imposing new disclosure requirements that would burden ~~smal~~ small public public
issuers.issuers.~~246~~267 H.R. 4476, introduced September 24, 2019, during the 116th Congress, would have set H.R. 4476, introduced September 24, 2019, during the 116th Congress, would have set

~~238~~ 259 Harvey Galper, Kim Rueben, Harvey Galper, Kim Rueben, Richard Auxier, and Amanda Eng, “Richard Auxier, and Amanda Eng, “ Municipal Debt: What Does it Buy and Who Municipal Debt: What Does it Buy and Who
Benefits?” Benefits?” National Tax Journal, December 2014, vol. 67(4), pp. 901, December 2014, vol. 67(4), pp. 901 -924, https://www.urban.org/sites/default/files/-924, https://www.urban.org/sites/default/files/
publication/33631/109047-municipal-debt-whatpublication/33631/109047-municipal-debt-what -does-it-buy-and-who-benefits-.pdf. -does-it-buy-and-who-benefits-.pdf.
~~239~~260 Government Accountability Office, Government Accountability Office, Factors Contributing to the Debt Crisis and Potential Federal Actions to
Address Them , GAO-18-387, pp. 38-40, May 9, 2018, https://www.gao.gov/products/GAO-18-387. , GAO-18-387, pp. 38-40, May 9, 2018, https://www.gao.gov/products/GAO-18-387.
~~240~~ 261 National Federation of Municipal Analysts, National Federation of Municipal Analysts, White Paper on Federal Securities Law Relating to Municipal
Securities, March 2008, https://www.nfma.org/assets/documents/DG.WP.securities_law_0803.doc.pdf. , March 2008, https://www.nfma.org/assets/documents/DG.WP.securities_law_0803.doc.pdf.
~~241~~262 Report of the Senate Committee on Banking, Housing and Urban Affairs to Accompany S.249, S.Rept. No. 94-75, , S.Rept. No. 94-75,
94th Cong., 1st sess.,94th Cong., 1st sess., p. 41 (1975). Also see Jon R. p. 41 (1975). Also see Jon R. ~~T andler, “~~ Tandler, “Municipal Antifraud Liability Under Municipal Antifraud Liability Under ~~t he~~the Federal Securities Federal Securities
LawsLaws upon Issuanceupon Issuance ~~of T ax~~ of Tax-Exempt Industrial Development Bonds,” -Exempt Industrial Development Bonds,” Journal of Urban & ~~Contem porary~~Contemporary Law, vol. 24, , vol. 24,
January 1993, pp. 193-212, https://openscholarship.wustl.edu/law_urbanlaw/vol24/iss1/7.January 1993, pp. 193-212, https://openscholarship.wustl.edu/law_urbanlaw/vol24/iss1/7. ~~Some~~ Some contended that prior to contended that prior to
the 1975 act, municipal securities issuersthe 1975 act, municipal securities issuers had been subjecthad been subject to the antifraud provisions of the federal securities laws. to the antifraud provisions of the federal securities laws.
~~242~~ 263 15 U.S.C. 15 U.S.C. §78o–4(d). John §78o–4(d). John ~~T ower was~~ Tower was then a Senator from then a Senator from ~~T exas.~~
~~243 U.S. Securities~~ Texas. 264 U.S. Securities and Exchange Commissioner Elisseand Exchange Commissioner Elisse B. Walter, A. A. Sommer, Jr. Corporate, Securities and B. Walter, A. A. Sommer, Jr. Corporate, Securities and
Financial Law Lecture, October 28, 2009, https://www.sec.gov/news/speech/2009/spch102809ebw.htm. Also see Sarah Financial Law Lecture, October 28, 2009, https://www.sec.gov/news/speech/2009/spch102809ebw.htm. Also see Sarah
Wynn, “Ex-SEC Chair Elisse Walter: Not Enough Progress on Muni Disclosure,”Wynn, “Ex-SEC Chair Elisse Walter: Not Enough Progress on Muni Disclosure,” Bond Buyer, February 24, 2020. , February 24, 2020.
~~244~~265 Maggie Maggie Guidotti, “Seeking ‘the SEC’sGuidotti, “Seeking ‘the SEC’s ~~Full~~ Full Protection’: A Critique of the New Frontier in Municipal Securities Protection’: A Critique of the New Frontier in Municipal Securities
Enforcement,” Enforcement,” University of Chicago Law Review, vol. 82(4), 2015, pp. 2045-2118, http://www.jstor.org/stable/, vol. 82(4), 2015, pp. 2045-2118, http://www.jstor.org/stable/
43655479. 43655479.
~~245~~266 Securities Securities and Exchange Commission, and Exchange Commission, Report on the Municipal Securities Market, July, July 31, 2012, 31, 2012,
https://www.sec.gov/news/studies/2012/munireport073112.pdf. https://www.sec.gov/news/studies/2012/munireport073112.pdf.
~~246 SEC, Fixed~~ 267 SEC, Fixed Income Market Structure Advisory Committee meeting, February 10, 2020, pp. 132-183, Income Market Structure Advisory Committee meeting, February 10, 2020, pp. 132-183,
https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-021020-transcript.pdf. https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-021020-transcript.pdf.
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data standards for financial disclosure, although it would not have imposed new disclosure data standards for financial disclosure, although it would not have imposed new disclosure
standards. standards.
The scale of Puerto Rico’s debt restructuring could conceivably lead to other modifications of The scale of Puerto Rico’s debt restructuring could conceivably lead to other modifications of
municipal finance practice. Federal bankruptcy law, which during the Great Depression was municipal finance practice. Federal bankruptcy law, which during the Great Depression was
extended to cover instrumentalities of state governments such as cities and public authorities, also extended to cover instrumentalities of state governments such as cities and public authorities, also
plays a role in how municipal bond contracts are structured and how investors and creditors share plays a role in how municipal bond contracts are structured and how investors and creditors share
risks. Past municipal bond defaults have affected how municipal bond markets operate. New York risks. Past municipal bond defaults have affected how municipal bond markets operate. New York
City’s financial crisis in the mid-1970s led to stronger investor disclosure requirements, and the City’s financial crisis in the mid-1970s led to stronger investor disclosure requirements, and the
early 1980s defaults of the Washington Public Power Supply System (WPPSS) led to the early 1980s defaults of the Washington Public Power Supply System (WPPSS) led to the
expansion of bond insurance.expansion of bond insurance.~~247~~268 In general, however, municipal defaults have been much less In general, however, municipal defaults have been much less
frequent than corporate or individual defaults.frequent than corporate or individual defaults.~~248~~269
Congress controls tax policy and the tax treatment of municipal securities more directly. Congress controls tax policy and the tax treatment of municipal securities more directly.
Modifications of the federal tax treatment of municipal securities could lead to significant Modifications of the federal tax treatment of municipal securities could lead to significant
changes in government finance because of the importance that tax advantages play in marketing changes in government finance because of the importance that tax advantages play in marketing
those securities. For instance, in 2006, those securities. For instance, in 2006, ~~Merril~~ Merrill Lynch advisors suggested that ERS and Lynch advisors suggested that ERS and ~~Merril~~
Merrill Lynch issue at least $7 Lynch issue at least $7 ~~bil ion~~ billion in pension obligation bonds (POBs). Because those bonds were in pension obligation bonds (POBs). Because those bonds were
~~ineligible~~ ineligible for federal tax exemptions, for federal tax exemptions, ~~Merril~~ Merrill Lynch was unable to place those bonds. UBS then Lynch was unable to place those bonds. UBS then
sold less than half that amount, as noted above, largely purchased through its own proprietary sold less than half that amount, as noted above, largely purchased through its own proprietary
accounts.accounts.~~249~~270 Had a larger amount of bonds been issued, the island government’s finances would Had a larger amount of bonds been issued, the island government’s finances would
have been in even worse shape. Thus, lack of federal tax exemption helped constrain the extent of have been in even worse shape. Thus, lack of federal tax exemption helped constrain the extent of
a strategy that an independent review concluded “was so badly structured that, rather than a strategy that an independent review concluded “was so badly structured that, rather than
yieldingyielding profits, it resulted in tremendous losses that have accelerated the demise of [the] profits, it resulted in tremendous losses that have accelerated the demise of [the]
Retirement System.”Retirement System.”~~250~~271 Modifying federal tax exemption requirements or limiting the amount of Modifying federal tax exemption requirements or limiting the amount of
certain types of bonds might restrain issues of debt that could create serious fiscal risks. Congress certain types of bonds might restrain issues of debt that could create serious fiscal risks. Congress
has also limitedhas also limited tax exemptions on some types of municipal bonds on other grounds.tax exemptions on some types of municipal bonds on other grounds.~~251~~272
Federal Policies and Municipal Debt Structures
Federal tax and bankruptcy law help shape financial decisions of state, local, and territorial Federal tax and bankruptcy law help shape financial decisions of state, local, and territorial
governments on how they structure their debts. For instance, governments on how they structure their debts. For instance, federal tax law constraints on issuance of constraints on issuance of tax-advantaged private private
activity bonds (PABs) and on advance refundings of municipal bonds have changed the “muni” activity bonds (PABs) and on advance refundings of municipal bonds have changed the “muni”
markets. Congress may consider how the different treatment of municipal bonds in federal markets. Congress may consider how the different treatment of municipal bonds in federal
bankruptcy law might affect how local governments approach municipal finance decisions. bankruptcy law might affect how local governments approach municipal finance decisions.
In municipal finance, GO bonds are In municipal finance, GO bonds are ~~typical y~~typically used to support publicly provided services and used to support publicly provided services and
infrastructure, such as streets, schools, and other public buildings, and are backed by a infrastructure, such as streets, schools, and other public buildings, and are backed by a
jurisdiction’s commitment to collect sufficient tax revenues. GO bonds, backed by the full faith jurisdiction’s commitment to collect sufficient tax revenues. GO bonds, backed by the full faith
and credit of a jurisdiction, have the advantage of being supported by a broad set of budgetary and credit of a jurisdiction, have the advantage of being supported by a broad set of budgetary

~~247~~ 268 Walter (2009), op. cit. Also see Beverly Hirtle, “Growth of the Financial Guarantee Market,” Walter (2009), op. cit. Also see Beverly Hirtle, “Growth of the Financial Guarantee Market,” Federal Reserve Bank
of New York Quarterly Review, Spring, Spring 1987, p. 18, https://fraser.stlouisfed.org/title/economic-policy-review-federal-1987, p. 18, https://fraser.stlouisfed.org/title/economic-policy-review-federal-
reserve-bank-new-york-1170/spring-1987-3020/growth-financial-guarantee-market-401663. reserve-bank-new-york-1170/spring-1987-3020/growth-financial-guarantee-market-401663.
~~248~~269 S&P Global, S&P Global, 2017 Annual U.S. Public Finance Default Study and Rating Transitions, May 8, 2018. , May 8, 2018.
~~249~~270 Kobre & Kim LLP, Kobre & Kim LLP, Final Investigative Report, August, August 20, 2018, https://drive.google.com/file/d/19-20, 2018, https://drive.google.com/file/d/19-
lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view,lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, pp. 158-159. pp. 158-159.
~~250~~271 Statement of Motives, Act 116-2011, July 6, 2011, http://osl.pr/download/en/2011/A-0116-2011.pdf. Statement of Motives, Act 116-2011, July 6, 2011, http://osl.pr/download/en/2011/A-0116-2011.pdf.
~~251 See CRS~~ 272 See CRS Report RL31457, Report RL31457, Private Activity Bonds: An Introduction, by , by ~~Steven Maguire and Joseph S. Hughes~~Grant A. Driessen. .
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resources, without a specific lien on revenues. The experience of restructuring Puerto Rico’s resources, without a specific lien on revenues. The experience of restructuring Puerto Rico’s
public debts could affect how future municipal finance arrangements are made. public debts could affect how future municipal finance arrangements are made.
Revenue bonds have Revenue bonds have ~~typical y~~typically been used to finance infrastructure to supply services that generate been used to finance infrastructure to supply services that generate
their own revenue through fees or charges, such as electric power, toll roads, water and sewers, their own revenue through fees or charges, such as electric power, toll roads, water and sewers,
and airports, often administered through authorities with some measure of independence from and airports, often administered through authorities with some measure of independence from
elected governments.elected governments.~~252~~273 If a project or authority failed to generate revenues sufficient to cover If a project or authority failed to generate revenues sufficient to cover
debt service, revenue bondholders debt service, revenue bondholders ~~general y~~generally could not obtain support from other revenue sources, could not obtain support from other revenue sources,
such as general tax revenues. Although revenue bonds are backed by more narrowly defined cash such as general tax revenues. Although revenue bonds are backed by more narrowly defined cash
flows, they carry the advantage that liens could be applied to a stream of fees and charges.flows, they carry the advantage that liens could be applied to a stream of fees and charges.
In 1988, Congress enacted bankruptcy legislation that included particular protections for In 1988, Congress enacted bankruptcy legislation that included particular protections for
bondholders’ interests in pledged fees and charges backing certain revenue bonds.bondholders’ interests in pledged fees and charges backing certain revenue bonds.~~253~~274 The 1988 act The 1988 act
added Section 928 to the Bankruptcy Code, which states “special revenues acquired by the debtor added Section 928 to the Bankruptcy Code, which states “special revenues acquired by the debtor
after the commencement of the case after the commencement of the case ~~shal~~ shall remain subject to any lien resulting from any security remain subject to any lien resulting from any security
agreement entered into by the debtor before the commencement of the case.”agreement entered into by the debtor before the commencement of the case.”~~254~~275 Without that Without that
exception, special revenues collected by a debtor would not be subject to lien.exception, special revenues collected by a debtor would not be subject to lien.~~255~~276 Litigation Litigation
regarding the restructuring of the Puerto Rico Highways and Transportation Authority (PRHTA) regarding the restructuring of the Puerto Rico Highways and Transportation Authority (PRHTA)
has raised questions about the treatment of revenue bonds and special revenues.has raised questions about the treatment of revenue bonds and special revenues.~~256~~277 Congress Congress
could consider modifying Section 928 of the Bankruptcy Code to clarify those issues. Some have could consider modifying Section 928 of the Bankruptcy Code to clarify those issues. Some have
contended a clearer treatment of special revenue bonds would lower financing costs for local contended a clearer treatment of special revenue bonds would lower financing costs for local
governments.governments.~~257~~
278 Ultra-Long-Term and Exotic Debt
Mutual funds provide Mutual funds provide ~~smal~~ small investors with the advantages of diversification by pooling large investors with the advantages of diversification by pooling large
numbers of securities. Expecting those investors, however, to monitor hundreds or thousands of numbers of securities. Expecting those investors, however, to monitor hundreds or thousands of
issuers, some of which may employ complex securities, may be unrealistic. A 1993 SEC staff issuers, some of which may employ complex securities, may be unrealistic. A 1993 SEC staff
report found that larger numbers of unsophisticated individual investors were buying municipal report found that larger numbers of unsophisticated individual investors were buying municipal

~~252 Annette T hau~~ 273 Annette Thau, , The Bond Book (New York: McGraw-Hill, (New York: McGraw-Hill, 2001), pp. 132-133. 2001), pp. 132-133.
~~253 T he~~274 The Senate’s explanation of the relevant provision of a bill enacted as Senate’s explanation of the relevant provision of a bill enacted as P.L. 100-597 stated that “[t]o eliminate the P.L. 100-597 stated that “[t]o eliminate the
confusion and to confirm various state lawsconfusion and to confirm various state laws and constitutional provisions regarding the rights of bondholders to receive and constitutional provisions regarding the rights of bondholders to receive
revenues pledgedrevenues pledged to them in payment of their debt obligations of a municipality, a newto them in payment of their debt obligations of a municipality, a new section is provided in the section is provided in the
Amendment to ensure that revenue bondholders receive the benefit of their bargain with the municipal issuerAmendment to ensure that revenue bondholders receive the benefit of their bargain with the municipal issuer and that and that
they will have unimpaired rights to the project revenues pledged to them.” U.S. Congress,they will have unimpaired rights to the project revenues pledged to them.” U.S. Congress, Senate Committee on the Senate Committee on the
Judiciary,Judiciary, Report to ~~Accom pany~~Accompany S. 1863, 100th Cong., 2nd sess., S.Rept. 100-506, 1988, p. 12. , 100th Cong., 2nd sess., S.Rept. 100-506, 1988, p. 12.
~~254~~ 275 11 U.S.C. 11 U.S.C. §928(a), applicable to 928(a), applicable to ~~T itle~~Title III cases by PROMESA III cases by PROMESA §301. §301.
~~255~~276 11 U.S.C. 11 U.S.C. §552(a) states that property acquired by a debtor after a bankruptcy filing “is not subject to any lien 552(a) states that property acquired by a debtor after a bankruptcy filing “is not subject to any lien
resulting from any security agreement entered into by the debtor before the resulting from any security agreement entered into by the debtor before the ~~comm encement~~commencement of the case.” One summary of the case.” One summary
of Chapter 9 provisions concludedof Chapter 9 provisions concluded that “Congress made clear that revenue bondholders are entitled to receive the that “Congress made clear that revenue bondholders are entitled to receive the
revenues pledgedrevenues pledged to them without any interference and on a timely basis.” Jamesto them without any interference and on a timely basis.” James E. Spiotto, E. Spiotto, Primer on Municipal Debt
~~Adjustm ent~~Adjustment: Chapter 9, 2012, p. 28, https://web.archive.org/web/20160206065733/http://afgi.org/resources/, 2012, p. 28, https://web.archive.org/web/20160206065733/http://afgi.org/resources/
Bankruptcy_Primer.pdf. Bankruptcy_Primer.pdf.
~~256 See~~ 277 See 1st Circuit, Opinion, Assured1st Circuit, Opinion, Assured Guaranty Corporation v. Commonwealth of Puerto RicoGuaranty Corporation v. Commonwealth of Puerto Rico , cases 18-1165 and 18-, cases 18-1165 and 18-
1166, p. 14, March 26, 2019, http://media.ca1.uscourts.gov/pdf.opinions/18-1165P-01A.pdf. 1166, p. 14, March 26, 2019, http://media.ca1.uscourts.gov/pdf.opinions/18-1165P-01A.pdf. ~~T he~~The U.S. Supreme Court U.S. Supreme Court
declineddeclined to review the case on January 13, 2020; see https://www.supremecourt.gov/docket/docketfiles/html/public/19-to review the case on January 13, 2020; see https://www.supremecourt.gov/docket/docketfiles/html/public/19-
391.html. Also see Karen Pierog, “391.html. Also see Karen Pierog, “ Court RulingCourt Ruling in Puerto Rico Bankruptcy Fans Revenue Bond Fears,”in Puerto Rico Bankruptcy Fans Revenue Bond Fears,” Reuters, Reuters,
March 28, 2019, https://www.reuters.com/article/usa-puertorico-bonds/courtMarch 28, 2019, https://www.reuters.com/article/usa-puertorico-bonds/court -ruling-in-puerto-rico-bankruptcy-fans--ruling-in-puerto-rico-bankruptcy-fans-
revenue-bond-fears-idUSL1N21E1HY. revenue-bond-fears-idUSL1N21E1HY.
~~257~~278 James E. Spiotto, “ James E. Spiotto, “~~T he~~The History and Justification for History and Justification for ~~T imely~~Timely Payment of Statutory Liens and Pledged Payment of Statutory Liens and Pledged Special Special
RevenuesRevenues Bond Financing in a Chapter 9 Municipal Debt Adjustment Proceeding: Is a Model State Law Necessary or Bond Financing in a Chapter 9 Municipal Debt Adjustment Proceeding: Is a Model State Law Necessary or
Required?”Required?” Municipal Finance Journal, vol. 39(4), winter 2019, pp. 47-97. , vol. 39(4), winter 2019, pp. 47-97.
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securities and that governments had come to rely on increasingly complex structured securities securities and that governments had come to rely on increasingly complex structured securities
and derivatives.and derivatives.~~258~~279 The onset of the financial crisis in mid-2007 led to the failure of exotic forms The onset of the financial crisis in mid-2007 led to the failure of exotic forms
of municipal debt widely marketed to individualof municipal debt widely marketed to individual investors.investors.~~259~~280 The underwriting and marketing of The underwriting and marketing of
POBs to retail investors in Puerto Rico has raised concerns.POBs to retail investors in Puerto Rico has raised concerns.~~260~~
281 Congress passed PROMESA, among other ends, to create a debt restructuring process that would Congress passed PROMESA, among other ends, to create a debt restructuring process that would
put Puerto Rico’s public finances on a sustainable basis, which could then anchor a healthier put Puerto Rico’s public finances on a sustainable basis, which could then anchor a healthier
economic climate.economic climate.~~261~~282 Risks due to uncertainties in future economic growth and population trends Risks due to uncertainties in future economic growth and population trends
could compound potential could compound potential ~~chal enges~~challenges embedded in the use of COFINA CABs. Some analysts embedded in the use of COFINA CABs. Some analysts
have noted that the use of financial instruments or public-private partnership agreements that have noted that the use of financial instruments or public-private partnership agreements that
provide governments with up-front proceeds may yield few benefits in later years and may shift provide governments with up-front proceeds may yield few benefits in later years and may shift
fiscal burdens to future generations that may have benefited little from the use of those fiscal burdens to future generations that may have benefited little from the use of those
proceeds.proceeds.~~262~~283
Congress could consider changes in requirements for federal tax exemptions Congress could consider changes in requirements for federal tax exemptions for municipal bonds to encourage issuers to encourage issuers
to rely on securities that avoid exotic structures or ultra-long maturitiesto rely on securities that avoid exotic structures or ultra-long maturities.
Bankruptcy Procedures, Disclosure, and Potential Conflicts of Interest
Congress could consider measures to protect the interests of a wider set of investors in complex Congress could consider measures to protect the interests of a wider set of investors in complex
bankruptcy cases, such as by strengthening or clarifying disclosure requirements. The COFINA bankruptcy cases, such as by strengthening or clarifying disclosure requirements. The COFINA
restructuring raised concerns that hedge funds and institutional investors involved in settlement restructuring raised concerns that hedge funds and institutional investors involved in settlement
negotiations were treated more favorably than individual investors. negotiations were treated more favorably than individual investors.
Congress could consider bolstering disclosure requirements for officials and professionals Congress could consider bolstering disclosure requirements for officials and professionals
engaged in the debt restructuring processesengaged in the debt restructuring processes . In the case of those engaged in procedures established by PROMESAestablished by PROMESA~~. The~~, the House unanimously House unanimously
passed H.R. 1192 (Puerto Rico Recovery Accuracy in Disclosures Act of 2021; PRRADA) on passed H.R. 1192 (Puerto Rico Recovery Accuracy in Disclosures Act of 2021; PRRADA) on
February 24, 2021, two days after it February 24, 2021, two days after it ~~had been~~ was introduced. A companion introduced. A companion ~~bil~~ bill was introduced in the was introduced in the
~~Senate on February 23, 2021. Both bil s would require professionals engaged in PROMESA Title~~
~~III actions to file a disclosure statement under Section 2014(a) of the Federal Rules of Bankruptcy~~
~~Procedure before being compensated. In particular, professionals would have to set forth their~~
~~connections with creditors, debtors, the Oversight Board and those it has employed, and other~~
~~interested parties. The bil would also require retroactive disclosures by professionals who had~~
~~already been compensated. In the 116th Congress, the House passed a similar measure (H.R. 683)~~
~~on December 8, 2020. A companion bil (S. 1675) had been introduced in the Senate on May 23,~~
~~2019.~~

~~258 U.S. Securities~~ Senate on February 23, 2021, and passed in amended form on December 18, 2021.284 After a resolution of differences, the measure (P.L. 117-82) was signed into law on January 20, 2022. 279 U.S. Securities and Exchange Commission, and Exchange Commission, Staff Report on the Municipal Securities Market, September 1993, , September 1993,
https://www.sec.gov/info/municipal/mr-munimarketreport1993.pdf. https://www.sec.gov/info/municipal/mr-munimarketreport1993.pdf.
~~259 See CRS~~ 280 See CRS Report RL34672, Report RL34672, Auction-Rate Securities, by D. Andrew, by D. Andrew Austin. Austin.
~~260~~281 Craig Craig McCann, EdwardMcCann, Edward O’Neal, and SusanO’Neal, and Susan Song,Song, “UBS“UBS and Santander’s Role in Underwritingand Santander’s Role in Underwriting Employee Employee
Retirement System Bonds,” SecuritiesRetirement System Bonds,” Securities Litigation & Consulting GroupLitigation & Consulting Group blog, May 16, 2017, http://blog.slcg.com/2017/blog, May 16, 2017, http://blog.slcg.com/2017/
05/ubs-and-santanders-role-in-underwriting.html. See also Nick Brown, “05/ubs-and-santanders-role-in-underwriting.html. See also Nick Brown, “ Puerto Rico’s Other Crisis: Impoverished Puerto Rico’s Other Crisis: Impoverished
Pensions,” Reuters, April 7, 2016, https://www.reuters.com/investigates/special-report/usa-puertorico-pensions/. Also Pensions,” Reuters, April 7, 2016, https://www.reuters.com/investigates/special-report/usa-puertorico-pensions/. Also
see David Evans, “How UBSsee David Evans, “How UBS ~~Spread~~ Spread the Pain of Puerto Rico’s Debt Crisisthe Pain of Puerto Rico’s Debt Crisis to Clients,” Bloomberg, September 22, to Clients,” Bloomberg, September 22,
2015, https://www.bloomberg.com/news/articles/2015-09-22/how-ubs-spread-the-pain-of-puerto-rico-s-debt-crisis-to-2015, https://www.bloomberg.com/news/articles/2015-09-22/how-ubs-spread-the-pain-of-puerto-rico-s-debt-crisis-to-
clients. clients.
~~261~~282 Rob Bishop and Sean Rob Bishop and Sean Duffy, “PROMESA Promises Hope for Puerto Rico and Its Investors,” Duffy, “PROMESA Promises Hope for Puerto Rico and Its Investors,” National Review, May , May
22, 2016, https://www.nationalreview.com/2016/05/puerto-rico-debt-crisis-promesa-bill-positive-solution/. 22, 2016, https://www.nationalreview.com/2016/05/puerto-rico-debt-crisis-promesa-bill-positive-solution/.
~~262~~283 John Gilmour, John Gilmour, ~~“T he Indiana T oll~~ “The Indiana Toll Road Lease as an Intergenerational Cash Road Lease as an Intergenerational Cash ~~T ransfer~~Transfer,” ,” Public Administration Review, ,
vol. 72, no. 6 (November/December 2017), pp. 856-865. vol. 72, no. 6 (November/December 2017), pp. 856-865.
284 An amendment offered by Sen. Manchin that was adopted requires the Oversight Board to compile a list of material interested parties. Those seeking compensation would need to report any connections with listed individuals. A requirement that those already compensated would have to file reports within 60 days of enactment was dropped. See Senate Energy and Natural Resources Committee, S.Rept. 117-48, December 13, 2021, https://www.congress.gov/117/crpt/srpt48/CRPT-117srpt48.pdf. Congressional Research Service 45~~Congressional Research Service~~

42

link to page link to page 2829 Puerto Rico’s Public Debts: Accumulation and Restructuring

The act requires professionals engaged in PROMESA Title III actions to file a disclosure statement under Section 2014(a) of the Federal Rules of Bankruptcy Procedure before being compensated. In particular, professionals would have to set forth their connections with those on a list of materially interested entities compiled by the Oversight Board. In the 116th Congress, the House passed a similar measure (H.R. 683) on December 8, 2020. A companion bill (S. 1675) had been introduced in the Senate on May 23, 2019. Hedge funds have played a central role in Puerto Rico’s debt restructuring, as Hedge funds have played a central role in Puerto Rico’s debt restructuring, as ~~wel~~ well as in other as in other
complex bankruptcy cases, in which debt and other claims are increasingly treated as liquid complex bankruptcy cases, in which debt and other claims are increasingly treated as liquid
assets.assets.~~263~~285 Hedge funds, through the scale of their investments, may enhance market efficiency by Hedge funds, through the scale of their investments, may enhance market efficiency by
overcoming collective action overcoming collective action ~~chal enges facing smal er~~challenges facing smaller or more traditional investors, as noted or more traditional investors, as noted
above. Hedge funds and similar funds, acting either singly or in concert, however, may above. Hedge funds and similar funds, acting either singly or in concert, however, may
disadvantage other claimants.disadvantage other claimants.~~264~~286 Conflicts of interest may be particularly salient in bankruptcy Conflicts of interest may be particularly salient in bankruptcy
and debt restructuring processes because major cases have involved a relatively narrow set of and debt restructuring processes because major cases have involved a relatively narrow set of
professionals.professionals.~~265~~287 In particular, the extensive and ongoing relationships among McKinsey—the In particular, the extensive and ongoing relationships among McKinsey—the
Oversight Board’s main contractor—and firms working on major bankruptcy cases have raised Oversight Board’s main contractor—and firms working on major bankruptcy cases have raised
concerns.concerns.~~266~~288
Stronger disclosure requirements on holdings of debt instruments and on potential conflicts of Stronger disclosure requirements on holdings of debt instruments and on potential conflicts of
interest may help level the playing field, an issue that Congress has addressed in the past. One interest may help level the playing field, an issue that Congress has addressed in the past. One
legal scholar argued that Congress crafted provisions of the 1934 Bankruptcy Act to curtail legal scholar argued that Congress crafted provisions of the 1934 Bankruptcy Act to curtail
opportunities for collusion among insiders to the disadvantage of other parties.opportunities for collusion among insiders to the disadvantage of other parties.~~267~~289 Another scholar Another scholar
argues that requiring investors to disclose “material rights against or affecting distressed firms, argues that requiring investors to disclose “material rights against or affecting distressed firms,
whether direct or derivative, and whether held singly or collectively, in real time, using online whether direct or derivative, and whether held singly or collectively, in real time, using online
market portals or similar information systems” would curtail potential abuses by unregulated market portals or similar information systems” would curtail potential abuses by unregulated
private investors such as hedge funds.private investors such as hedge funds.~~268~~290 Research on other asset-trading disclosure requirements Research on other asset-trading disclosure requirements
~~suggests that they limit insiders’ excess gains.269 According to economic theory, reducing insiders’~~
~~excess gains would enhance assets’ attractiveness to rational smal investors.~~

~~263~~ 285 “Claims trading is increasingly important given the emerging role of hedge “Claims trading is increasingly important given the emerging role of hedge funds in Chapter 11 proceedings and the funds in Chapter 11 proceedings and the
roaring controversy over their disclosure obligations under Federalroaring controversy over their disclosure obligations under Federal ~~Rule~~ Rule of Bankruptcy Procedure 2019.” Henry Tof Bankruptcy Procedure 2019.” Henry T .C. .C.
HuHu and Jay L. Westbrook, “and Jay L. Westbrook, “ Abolition of the Corporate Duty to Creditors,” Abolition of the Corporate Duty to Creditors,” ~~Colum bia~~Columbia Law Review, vol. 107, no. 193 , vol. 107, no. 193
(October 2007), http://ssrn.com/abstract=977582. (October 2007), http://ssrn.com/abstract=977582.
~~264~~ 286 Marcel Kahan and Edward Marcel Kahan and Edward B. Rock, “Hedge FundsB. Rock, “Hedge Funds in Corporate Governance and Corporate Control,” in Corporate Governance and Corporate Control,” Univ. of
Pennsylvania Law Review, vol. 155 (May 2007), pp. 1077-1079, http://scholarship.law.upenn.edu/faculty_scholarship/, vol. 155 (May 2007), pp. 1077-1079, http://scholarship.law.upenn.edu/faculty_scholarship/
94. 94. ~~T he~~The authors suggest authors suggest a reconsideration of Securitiesa reconsideration of Securities and Exchange Commission rule 13(d) filingand Exchange Commission rule 13(d) filing requirements in the requirements in the
context of corporate control (cf. SEC Rule 13d-5(b)(1), 17 C.F.R. §240.13d-5(b)(1)). context of corporate control (cf. SEC Rule 13d-5(b)(1), 17 C.F.R. §240.13d-5(b)(1)).
~~265~~287 Lynn M. LoPucki, “ Lynn M. LoPucki, “~~T he~~The Demographics of Bankruptcy Practice,” Demographics of Bankruptcy Practice,” American Bankruptcy Law Journal, vol. 63, 1989, , vol. 63, 1989,
pp. 289-320. pp. 289-320.
~~266~~ 288 Michelle Celarier, “ Michelle Celarier, “~~T he~~The Story McKinsey Didn’t Want Written,” Story McKinsey Didn’t Want Written,” Institutional Investor, July 8, 2019, , July 8, 2019,
https://www.institutionalinvestor.com/article/b1g5zjdcr97k2y/The-Story-McKinsey-Didn-t-Want-Written. Mary https://www.institutionalinvestor.com/article/b1g5zjdcr97k2y/The-Story-McKinsey-Didn-t-Want-Written. Mary
Williams Walsh, “Williams Walsh, “ One Man vs. McKinsey: A Billionaire SaysOne Man vs. McKinsey: A Billionaire Says the Consultancy Has Riggedthe Consultancy Has Rigged the Bankruptcy Systemthe Bankruptcy System ,” ,”
New York ~~Tim es~~Times, April 11, 2019. Also see the section , April 11, 2019. Also see the section “ Concerns over COFINA Settlement and Ethical Conflicts.”
~~267~~289 David A. Skeel, Jr., “Markets, Courts, and the Brave New David A. Skeel, Jr., “Markets, Courts, and the Brave New World of Bankruptcy World of Bankruptcy ~~T heory~~Theory,” ,” Wisconsin Law Review, ,
1993, p. 493, https://scholarship.law.upenn.edu/faculty_scholarship/1268. “1993, p. 493, https://scholarship.law.upenn.edu/faculty_scholarship/1268. “ Prior to the enactment of section 77B of the Prior to the enactment of section 77B of the
Bankruptcy Act in 1934, the fate of financially distressed firms wasBankruptcy Act in 1934, the fate of financially distressed firms was played out almost exclusively in state foreclosure played out almost exclusively in state foreclosure
and receivership proceedings and their federal counterparts.… and receivership proceedings and their federal counterparts.… ~~T he~~The widespread perception that this system facilitated widespread perception that this system facilitated
collusion sparked the decision to undertake a vast reformation of the nationcollusion sparked the decision to undertake a vast reformation of the nation ’s insolvency laws. Critics of the equity ’s insolvency laws. Critics of the equity
receivership process werereceivership process were particularly concerned that management and particularly concerned that management and ~~senio r~~senior creditors conspired to squeeze creditors conspired to squeeze out out
bondholders and other widelybondholders and other widely ~~dispersed~~ dispersed investors.” investors.”
~~268~~ 290 Jonathan C. Lipson, “ Jonathan C. Lipson, “~~T he~~The Shadow Bankruptcy System,” Shadow Bankruptcy System,” Boston Univ. Law Review, vol. 89(5), 2009, p. 1619, , vol. 89(5), 2009, p. 1619,
http://www.bu.edu/law/journals-archive/bulr/volume89n5/documents/LIPSON.pdf. http://www.bu.edu/law/journals-archive/bulr/volume89n5/documents/LIPSON.pdf.
~~269 André Betzer, Jasmin Gider, Daniel Metzger, and Erik T heissen, “Stealth T rading and T rade Reporting by~~
~~Corporate Insiders,” Review of Finance, vol. 19 no. 2 (March 2015), pp. 865-905. Also see Ruidi Huang and Yuhai~~
~~Xuan, “‘T rading’ Political Favors: Evidence from the Impact of the ST OCK Act ,” working paper, January 1, 2021,~~
~~https://ssrn.com/abstract=2765876.~~
~~Congressional Research Service~~

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~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~
Congressional Research Service 46 Puerto Rico’s Public Debts: Accumulation and Restructuring suggests that they limit insiders’ excess gains.291 According to economic theory, reducing insiders’ excess gains would enhance assets’ attractiveness to rational small investors.
An Audit of Puerto Rico’s Public Debt
H.R. 6975, introduced on May 22, 2020, would have established a commission to audit H.R. 6975, introduced on May 22, 2020, would have established a commission to audit al all public public
debt issued by Puerto Rico since 1972.debt issued by Puerto Rico since 1972.~~270~~292 The measure would also have The measure would also have ~~al owed~~allowed discharge of discharge of
some unsecured debts, applied certain ethics requirements to the Oversight Board, provided some unsecured debts, applied certain ethics requirements to the Oversight Board, provided
federal funding for Board activities, and commissioned a Government Accountability Office federal funding for Board activities, and commissioned a Government Accountability Office
(GAO) report on the Board’s spending and activities, among other provisions.(GAO) report on the Board’s spending and activities, among other provisions.
This proposal to audit the island’s public debt followed other initiatives. In July 2015, the Puerto This proposal to audit the island’s public debt followed other initiatives. In July 2015, the Puerto
Rico legislature enacted Act 97-2015, which, among other provisions, established a Commission Rico legislature enacted Act 97-2015, which, among other provisions, established a Commission
for a Comprehensive Audit of Public Credit.for a Comprehensive Audit of Public Credit.~~271~~293 The act’s The act’s ~~preamble272 stated~~
~~As one of the necessary mechanisms to proceed towards a broad fiscal and~~ preamble294 stated As one of the necessary mechanisms to proceed towards a broad fiscal and financial financial
restructuring, this Legislative Assembly recognizes as prudent and necessary the creation restructuring, this Legislative Assembly recognizes as prudent and necessary the creation
of an independent commission composed of members from the public sector and private of an independent commission composed of members from the public sector and private
citizens, drawn from diverse strategic sectors of civil society, entrusted with the citizens, drawn from diverse strategic sectors of civil society, entrusted with the
responsibilityresponsibility ~~to audit the totality of Puerto Rico’s public debt. The commission will~~
~~operate in an autonomous manner and will have the necessary authority to evaluate al~~
to audit the totality of Puerto Rico’s public debt. The commission will operate in an autonomous manner and will have the necessary authority to evaluate all government transactions pertinent to the tasks assigned by this law. government transactions pertinent to the tasks assigned by this law.
Governor Governor ~~Rossel ó~~Rosselló Nevares disbanded the commission after he took office in 2017. Nevares disbanded the commission after he took office in 2017.~~273~~295 Volunteer Volunteer
citizen efforts have attempted to continue the former commission’s work, although without citizen efforts have attempted to continue the former commission’s work, although without
~~formal investigative powers.274 For instance, one citizen group in January 2019 issued a report~~
~~chal enging the legal basis of COFINA debt.275~~
~~The Oversight Board commissioned an investigation of Puerto Rico’s debt by the law firm Kobre~~
~~& Kim, which produced a 608-page final investigative report in August 2018.276 Although the~~

~~270 T he~~ 291 André Betzer, Jasmin Gider, Daniel Metzger, and Erik Theissen, “Stealth Trading and Trade Reporting by Corporate Insiders,” Review of Finance, vol. 19 no. 2 (March 2015), pp. 865-905. Also see Ruidi Huang and Yuhai Xuan, “‘Trading’ Political Favors: Evidence from the Impact of the STOCK Act,” working paper, January 1, 2021, https://ssrn.com/abstract=2765876. 292 The House Committee on Natural Resources held a hearing on October 22, 2019, to consider a discussion House Committee on Natural Resources held a hearing on October 22, 2019, to consider a discussion ~~draft~~ draft that that
includedincluded many of the provisions included in H.R. 6975. U.S. Congress, Housemany of the provisions included in H.R. 6975. U.S. Congress, House Committee on Natural Resources, Committee on Natural Resources,
PROMESA: Discussion Draft (Day One), 116th Cong., 1st sess., October 22, 2019. Discussion, 116th Cong., 1st sess., October 22, 2019. Discussion draft is available at draft is available at
http://docs.house.gov/meetings/II/II00/20191022/110103/BILLS-116pih-http://docs.house.gov/meetings/II/II00/20191022/110103/BILLS-116pih-
~~T oamendthePuertoRicoOversightManagementandEconomicStabilityActorPROMESAandforotherpurpose s.pdf.~~
~~271~~ToamendthePuertoRicoOversightManagementandEconomicStabilityActorPROMESAandforotherpurposes.pdf. 293 Act 97-2015, July 1, 2015, http://www.lexjuris.com/LexLex/Leyes2015/lexl2015097.htm. Act 97-2015, July 1, 2015, http://www.lexjuris.com/LexLex/Leyes2015/lexl2015097.htm.
~~272~~294 Original text: Original text: Como uno de los mecanismos necesarios para poner en marcha un proceso amplio de
reestructuración fiscal y financiera, esta ~~Asam blea~~Asamblea Legislativa entiende prudente y necesaria la creación de una
~~com isión~~comisión independiente integrada por funcionarios del sector publico y de ciudadanos privados, provenientes de
diversos sectores estrategicos en la sociedad civil, ~~encom endada~~encomendada con la responsabilidad de auditar la totalidad de la
deuda publica puertorriqueña. La ~~com isión~~comisión operara de ~~m anera~~manera autónoma y tendrá la autoridad necesaria para
evaluar todas las transacciones ~~gubernam entales~~gubernamentales que entienda pertinentes para las tareas que le serán ~~encom endadas~~encomendadas
por esta Ley.
~~273~~295 Luis Luis J. Valentín Ortiz, “Puerto Rico Debt Audit DragsJ. Valentín Ortiz, “Puerto Rico Debt Audit Drags on as Creditor Negotiations Heat Up: Almost on as Creditor Negotiations Heat Up: Almost ~~T wo~~Two Years Years
After the Enactment of the Federal PROMESA LawAfter the Enactment of the Federal PROMESA Law and the Imposition of aand the Imposition of a Fiscal Control Board, Puerto Rico Still Fiscal Control Board, Puerto Rico Still
Lacks a PublicLacks a Public Debt Audit that Shows, Without Doubt, HowDebt Audit that Shows, Without Doubt, How Much Debt wasMuch Debt was Legally Contracted,” Center for Legally Contracted,” Center for
Investigative Journalism, June 11, 2018, http://periodismoinvestigativo.com/2018/06/puerto-rico-debt-audit-drags-on-Investigative Journalism, June 11, 2018, http://periodismoinvestigativo.com/2018/06/puerto-rico-debt-audit-drags-on-
as-creditor-negotiations-heat-up/. as-creditor-negotiations-heat-up/.
~~274 Noticel, “Desmantelar Comisión de Auditoría de Deuda Sirve para Encubrir Ilegalidades [Dismantling the~~
~~Committee to Audit the Debt Serves to Cover Up Illegal Actions] ,” January 27, 2017, https://www.noticel.com/junta-~~
~~fiscal/ahora/credito-de-pr/economia/20170127/desmantelar-comision-de-auditoria-de-deuda-sirve-para-encubrir-~~
~~ilegalidades/.~~
~~275 Comisión Ciudadana para la Auditoría Integral del Crédito Público, COFINA: Deuda Ilegal e Ilegitima [COFINA:~~
~~Illegal and Illegitimate Debt], January 15, 2019, https://media.noticel.com/o2com-noti-media-us-east-1/document_dev/~~
~~2019/01/17/Informe%20sobre%20COFINA%20enero%202019_1547740010072_30040005_ver1.0.pdf .~~
~~276 Kobre & Kim LLP, Final Investigative Report, August 20, 2018, pp. 167-168, https://drive.google.com/file/d/19-~~
~~lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view. Also see Arthur J. González, “ Oversight Board Member: Read the PR~~
~~Congressional Research Service~~

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~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

Congressional Research Service 47 Puerto Rico’s Public Debts: Accumulation and Restructuring formal investigative powers.296 For instance, one citizen group in January 2019 issued a report challenging the legal basis of COFINA debt.297 The Oversight Board commissioned an investigation of Puerto Rico’s debt by the law firm Kobre & Kim, which produced a 608-page final investigative report in August 2018.298 Although the Kobre & Kim report was extensive, some contended that key points were less than fully Kobre & Kim report was extensive, some contended that key points were less than fully
investigated.investigated.~~277~~299 Some of those concerns overlapped with concerns regarding gaps in the reporting Some of those concerns overlapped with concerns regarding gaps in the reporting
of possible conflicts of interest among those involved in debt restructuring in various roles. The of possible conflicts of interest among those involved in debt restructuring in various roles. The
UCC has also sought to obtain documents and other evidence in PROMESA Title III litigation.UCC has also sought to obtain documents and other evidence in PROMESA Title III litigation.~~278~~300
The Oversight Board, as noted above, The Oversight Board, as noted above, ~~chal enged~~challenged certain debts. Oversight Board Executive certain debts. Oversight Board Executive
Director Natalie Jaresko, responding to congressional questions in an October 2019 hearing, Director Natalie Jaresko, responding to congressional questions in an October 2019 hearing,
opposed a new effort to audit Puerto Rico’s public debts, which, in her view, would delay opposed a new effort to audit Puerto Rico’s public debts, which, in her view, would delay
restructuring processes restructuring processes ~~now~~ underway and the resolution of PROMESA Title III litigation.underway and the resolution of PROMESA Title III litigation.~~279~~301
A A ~~bil~~ bill was introduced in the Puerto Rican Senate on February 25, 2021, that would again establish was introduced in the Puerto Rican Senate on February 25, 2021, that would again establish
a commission to audit the island’s public debts.a commission to audit the island’s public debts.~~280~~302 The Oversight Board contended that such a The Oversight Board contended that such a
commission would duplicate work done by Kobre & Kim and suggested the Puerto Rican Senate commission would duplicate work done by Kobre & Kim and suggested the Puerto Rican Senate
modify the modify the ~~bil .281~~
bill.303 Constitutional Restraints May Be an Ineffective Substitute for
Prudent Budgeting
Some economists have Some economists have ~~cal ed~~called for imposing constitutional restrictions on government finances, for imposing constitutional restrictions on government finances,
such as on outlays, revenues, or debt. The Puerto Rican Constitution, as discussed above, includes such as on outlays, revenues, or debt. The Puerto Rican Constitution, as discussed above, includes
a balanced budget requirement and various constraints on public debt. Those provisions, however, a balanced budget requirement and various constraints on public debt. Those provisions, however,
did not appear to set an effective constraint on levels of indebtedness. In the 1840s, when several did not appear to set an effective constraint on levels of indebtedness. In the 1840s, when several
states had defaulted on or repudiated public debts, other states in similar fiscal straits managed to states had defaulted on or repudiated public debts, other states in similar fiscal straits managed to
avoid default, apparently motivated by a desire to maintain good credit. Those examples might avoid default, apparently motivated by a desire to maintain good credit. Those examples might
motivate federal policymakers to reassess the utility of constitutional or legal mechanisms to motivate federal policymakers to reassess the utility of constitutional or legal mechanisms to
~~ensure sustainable fiscal policies relative to other ways of establishing fiscal balance. Sound fiscal~~
~~policies may provide a better bulwark against default.~~

~~Debt Report,” Bond Buyer, March 4, 2021.~~
~~277 Luis J. Valentín Ortiz, “Puerto Rico Debt Audit Drags on as Creditor Negotiations Heat Up: Almost T wo Years~~
~~After the Enactment of the Federal PROMESA Law and the Imposition of a Fiscal Control Board, Puerto Rico Still~~
~~Lacks a Public Debt Audit that Shows, Without Doubt, How Much Debt was Legally Contracted,” Center for~~
~~Investigative Journalism, June 11, 2018, http://periodismoinvest igativo.com/2018/06/puerto-rico-debt-audit-drags-on-~~
~~as-creditor-negotiations-heat-up/.~~
~~278 Ibid.~~
~~279 T estimony of Natalie Jaresko, Executive Director of the Oversight Board, in U.S. Congress, House Committee on~~
~~Natural Resources,~~ ~~Proposed Am endm ents to the Puerto Rico Oversight, Managem ent, and Econom ic Stability Act~~
~~(PROMESA), hearings, 116th Cong., 1st sess., October 22, 2019, http://naturalresources.house.gov/download/ms-~~
~~natalie-jaresko-testimony-fc-leg-hrg-102219-promesa-ii-day-1.~~
~~280 PR Senate Bill 205, https://sutra.oslpr.org/osl/esutra/MedidaReg.aspx?rid=138023.~~
~~281~~ 296 Noticel, “Desmantelar Comisión de Auditoría de Deuda Sirve para Encubrir Ilegalidades [Dismantling the Committee to Audit the Debt Serves to Cover Up Illegal Actions],” January 27, 2017, https://www.noticel.com/junta-fiscal/ahora/credito-de-pr/economia/20170127/desmantelar-comision-de-auditoria-de-deuda-sirve-para-encubrir-ilegalidades/. 297 Comisión Ciudadana para la Auditoría Integral del Crédito Público, COFINA: Deuda Ilegal e Ilegitima [COFINA: Illegal and Illegitimate Debt], January 15, 2019, https://media.noticel.com/o2com-noti-media-us-east-1/document_dev/2019/01/17/Informe%20sobre%20COFINA%20enero%202019_1547740010072_30040005_ver1.0.pdf. 298 Kobre & Kim LLP, Final Investigative Report, August 20, 2018, pp. 167-168, https://drive.google.com/file/d/19-lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view. Also see Arthur J. González, “Oversight Board Member: Read the PR Debt Report,” Bond Buyer, March 4, 2021. 299 Luis J. Valentín Ortiz, “Puerto Rico Debt Audit Drags on as Creditor Negotiations Heat Up: Almost Two Years After the Enactment of the Federal PROMESA Law and the Imposition of a Fiscal Control Board, Puerto Rico Still Lacks a Public Debt Audit that Shows, Without Doubt, How Much Debt was Legally Contracted,” Center for Investigative Journalism, June 11, 2018, http://periodismoinvestigativo.com/2018/06/puerto-rico-debt-audit-drags-on-as-creditor-negotiations-heat-up/. 300 Ibid. 301 Testimony of Natalie Jaresko, Executive Director of the Oversight Board, in U.S. Congress, House Committee on Natural Resources, Proposed Amendments to the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), hearings, 116th Cong., 1st sess., October 22, 2019, http://naturalresources.house.gov/download/ms-natalie-jaresko-testimony-fc-leg-hrg-102219-promesa-ii-day-1. 302 PR Senate Bill 205, https://sutra.oslpr.org/osl/esutra/MedidaReg.aspx?rid=138023. 303 Oversight Board, letter to Puerto Rican Senator Nick Pastrana, April 9, 2021, https://drive.google.com/file/d/ Oversight Board, letter to Puerto Rican Senator Nick Pastrana, April 9, 2021, https://drive.google.com/file/d/
1HfBUZEHAzrXB5Po_pySrLSQ7wZp_mKvQ/view. 1HfBUZEHAzrXB5Po_pySrLSQ7wZp_mKvQ/view.
Congressional Research Service Congressional Research Service

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~~link to page 50 link to page 16 link to page 16~~48 Puerto Rico’s Public Debts: Accumulation and Restructuring ensure sustainable fiscal policies relative to other ways of establishing fiscal balance. Sound fiscal policies may provide a better bulwark against default. Congressional Research Service 49 link to page 55 link to page 18 link to page 18 Puerto Rico’s Public Debts: Accumulation and Restructuring

Appendix A. Details of Puerto Rico’s Public Debt
Table A-1 presents data presents data ~~underlyi~~ngunderlying Figure 2, ~~which~~ which provides a breakdown of Puerto Rico’s provides a breakdown of Puerto Rico’s
public debts at the end of July 2016, shortly before the PROMESA debt restructuring process public debts at the end of July 2016, shortly before the PROMESA debt restructuring process
commenced. One column shows indebtedness to the GDB (commenced. One column shows indebtedness to the GDB (GDB Loan), which had been the ), which had been the
Puerto Rican government’s fiscal agent and advisor. Public agencies and corporations deposited Puerto Rican government’s fiscal agent and advisor. Public agencies and corporations deposited
funds in GDB accounts, and the GDB extended loans to some public corporations as an funds in GDB accounts, and the GDB extended loans to some public corporations as an
alternative to issuing bonds to the municipal finance market. GDB bonds are excluded from alternative to issuing bonds to the municipal finance market. GDB bonds are excluded from
Figure 2 to minimize double counting. to minimize double counting.
Table A-1. Puerto Rico’s Public Debt As of July 31, 2016, in $ Millions
Bonds &
GDB
Other
Total

Private Loans
Loans
Loans
Debt
Direct Good Faith & Credit: General Obligations
12,543
169
- -
12,713

Indebtedness Payable Primarily from Commonwealth Taxes

COFINA COFINA
17,322 17,322
- -
- -
17,322 17,322

Highways & Transportation Authority Highways & Transportation Authority
4,176 4,176
1,734 1,734
- -
5,910 5,910

PRIFA (Guaranteed Portion) PRIFA (Guaranteed Portion)
1,861 1,861
- -
- -
1,861 1,861

Puerto Rico Convention Center District Puerto Rico Convention Center District Authority Authority
386 386
4 4
- -
391 391

Metropolitan Bus Authority Metropolitan Bus Authority
28 28
- -
- -
28 28

Subtotal
23,774
1,738
- -
25,512

Indebtedness Payable Primarily from Commonwealth

Appropriations

Public Building Authority (Guaranteed Portion) Public Building Authority (Guaranteed Portion)
4,005 4,005
182 182
- -
4,187 4,187

Retirement Retirement System for Employees (ERS) System for Employees (ERS)
3,144 3,144
- -
- -
3,144 3,144

Public Finance Corporation (PFC) Public Finance Corporation (PFC)
1,091 1,091
- -
- -
1,091 1,091

Other Agencies & Public Corporations Other Agencies & Public Corporations
- -
2,999 2,999
102 102
3,101 3,101

Subtotal
8,239
3,181
102
11,523

Indebtedness Payable by Tax-Supported Public Corporations

Government Development Government Development Bank (Guaranteed Bank (Guaranteed
4,014 4,014
- -
- -
4,014 4,014
Portion) Portion)
University of Puerto Rico University of Puerto Rico
496 496
76 76
- -
573 573
Puerto Rico Industrial Development Company Puerto Rico Industrial Development Company
159 159
78 78
- -
237 237
(PRIDCO) (PRIDCO)
Port of the Americas Port of the Americas Authority (APLA; Guaranteed) Authority (APLA; Guaranteed)
226 226
2 2
- -
227 227

Highways & Transportation Authority T. Moscoso Highways & Transportation Authority T. Moscoso
140 140
- -
- -
140 140
Bonds Bonds
Puerto Rico Infrastructure Finance Authority Puerto Rico Infrastructure Finance Authority
226 226
- -
- -
226 226

( (
~~OPto~~
~~h r~~
~~e trs &~~
~~Ag A~~
~~enM~~
~~ci S~~
~~e C~~
~~s A~~
~~a )~~
nOPo th rts er & AM Agenci SCA) es an d Public Corporation d Public Corporation
0 0
609 609
- -
609 609

Subtotal
5,262
765
- -
6,027

Indebtedness Payable by Non-Tax-Supported Public Corporations

Puerto Rico Energy Power Authority (PREPA) Puerto Rico Energy Power Authority (PREPA)
8,955 8,955
35 35
1 1
8,991 8,991
Puerto Rico Aqueduct & Sewer Authority (PRASA) Puerto Rico Aqueduct & Sewer Authority (PRASA)
3,980 3,980
66 66
581 581
4,627 4,627
Guaranteed) Guaranteed)
Subtotal
12,935
101
582
13,618
Municipios’ Indebtedness

General General Obligations (Property Tax) Obligations (Property Tax)
881 881
1,316 1,316
- -
2,197 2,197

Municipal Finance Authority (Property Tax) Municipal Finance Authority (Property Tax)
620 620
- -
- -
620 620

Sales & Use Tax Sales & Use Tax
5 5
533 533
- -
538 538

Special Obligations and Other Special Obligations and Other
221 221
236 236
- -
457 457

Subtotal
1,726
2,085
- -
3,811
Congressional Research Service Congressional Research Service

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Puerto Rico’s Public Debts: Accumulation and Restructuring

Bonds &
GDB
Other
Total

Private Loans
Loans
Loans
Debt

Nonrecourse Indebtedness

Children’s Children’s Trust Trust
1,442 1,442
- -
- -
1,442 1,442

Housing Finance Authority (HFA) Housing Finance Authority (HFA)
487 487
85 85
- -
572 572

Puerto Rico Industrial Investment Corporation Puerto Rico Industrial Investment Corporation
103 103
- -
- -
103 103
(PRIICO) (PRIICO)
Other Agencies and Public Corporations Other Agencies and Public Corporations
14 14
0 0
- -
14 14

Subtotal
2,046
85
- -
2,132
Total
66,526
8,124
684
75,334

Exclusions to Eliminate Double Counting

Total Indebtedness Total Indebtedness

75,334 75,334

Less: Less: ~~Government Development~~ Government Development Bank Bonds Bank Bonds

-3,766 -3,766

Total “Public Sector Debt” Including COFINA Capital Appreciation Bond Accretion Total “Public Sector Debt” Including COFINA Capital Appreciation Bond Accretion
71,568 71,568

Less: Less: Capital Appreciation Bond (CAB) Accretion Capital Appreciation Bond (CAB) Accretion
-2,914 -2,914

TOTAL PUBLIC SECTOR DEBT
68,654
Source: CRS calculations based on CRS calculations based on Commonwealth of Puerto Rico Financial Information ~~and Operating~~ and Operating Data Report, ,
DecemberDecember 18, 2016, https://web.archive.org/web/20170101045953/http://bgfpr.com/documents/18, 2016, https://web.archive.org/web/20170101045953/http://bgfpr.com/documents/
CommonwealthofPuertoRicoFinancialInfoFY201612-18-16.pdf. CommonwealthofPuertoRicoFinancialInfoFY201612-18-16.pdf.
Notes: Items might not sum to totals due to rounding. Debt of COFINA ( Items might not sum to totals due to rounding. Debt of COFINA (Corporación del Fondo de Interés
Apremiante;; Puerto Rico SalesPuerto Rico Sales Tax Financing Corporation) was restructured in January 2019. Debt of the Tax Financing Corporation) was restructured in January 2019. Debt of the
Government DevelopmentGovernment Development Bank was restructured in NovemberBank was restructured in November 2018. AMSCA is the Spanish acronym of the 2018. AMSCA is the Spanish acronym of the
Mental Health and Anti-Addiction ServicesMental Health and Anti-Addiction Services Administration.Administration. See source document for other notes and caveats. See source document for other notes and caveats.

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Appendix B. Price Trends and Trading Volumes for
Selected Bonds
Prices of Puerto Rico’s bonds have experienced wide swings since the island’s fiscal precarity Prices of Puerto Rico’s bonds have experienced wide swings since the island’s fiscal precarity
became more widely known in 2013. Prices reveal market views of the value of future cash flows, became more widely known in 2013. Prices reveal market views of the value of future cash flows,
which in the case of Puerto Rico’s public bonds which in the case of Puerto Rico’s public bonds ~~wil~~ will be determined in large part by the debt be determined in large part by the debt
restructuring processes created by PROMESA. restructuring processes created by PROMESA.
Some in Congress have expressed concerns that some investors may have traded on nonpublic Some in Congress have expressed concerns that some investors may have traded on nonpublic
information obtained in the course of PROMESA Title III negotiations among creditors, the information obtained in the course of PROMESA Title III negotiations among creditors, the
Oversight Board, and representatives of Puerto Rico’s government. Charts shown below depict Oversight Board, and representatives of Puerto Rico’s government. Charts shown below depict
price trajectories and trading volumes for selected bonds. CRS chose specific bonds either price trajectories and trading volumes for selected bonds. CRS chose specific bonds either
because the U.S. Treasury had identified them as representative in materials distributed in the because the U.S. Treasury had identified them as representative in materials distributed in the
legislativelegislative deliberations that led to PROMESA or because they were larger issues that would deliberations that led to PROMESA or because they were larger issues that would
~~likely~~ likely be more liquid than be more liquid than ~~smal er~~smaller issues. CRS also chose bonds that would have been affected by issues. CRS also chose bonds that would have been affected by
~~initiatives~~ initiatives by the Oversight Board and the UCC to invalidateby the Oversight Board and the UCC to invalidate certain GO and PBAcertain GO and PBA bonds. bonds.
Some 18 entities issued public debt on behalf of Puerto Rico, which added to the complexity of Some 18 entities issued public debt on behalf of Puerto Rico, which added to the complexity of
the island’s debt structure. In addition, most bond issuances were divided into multiple subissues. the island’s debt structure. In addition, most bond issuances were divided into multiple subissues.
Therefore, the figures below give a partial view of trading activity.Therefore, the figures below give a partial view of trading activity.~~282~~
304 The charts also show, by means of vertical lines, some key events in the restructuring processes. The charts also show, by means of vertical lines, some key events in the restructuring processes.
Those key dates, and other events, are listed iThose key dates, and other events, are listed in Table C-1, ~~with~~ with links to related documents. links to related documents.
Rational investors trade when they have new information, when assets’ risk characteristics are Rational investors trade when they have new information, when assets’ risk characteristics are
perceived to have shifted, or due to liquidityperceived to have shifted, or due to liquidity needs. needs.
COFINA Prices and Volumes
Figure B-1 shows the evolution of prices and trading volumes for senior and subordinate (junior) shows the evolution of prices and trading volumes for senior and subordinate (junior)
COFINA bonds from 2016 through February 2019, when old COFINA bonds were exchanged for COFINA bonds from 2016 through February 2019, when old COFINA bonds were exchanged for
new ones. Trading amounts are aggregated by week, with bars centered on Mondays.new ones. Trading amounts are aggregated by week, with bars centered on Mondays.~~283~~305 Trade Trade
volumes are volumes are ~~typical y~~typically larger for junior bonds, which was a larger issue, but also may reflect larger for junior bonds, which was a larger issue, but also may reflect
strategic purchases, as described in a previous section. Other things equal, larger bond issues are strategic purchases, as described in a previous section. Other things equal, larger bond issues are
more liquid and trade more frequently. more liquid and trade more frequently.
Trades in junior bonds picked up after PROMESA’s enactment, but those volumes were dwarfed Trades in junior bonds picked up after PROMESA’s enactment, but those volumes were dwarfed
by some large trades after COFINA defaulted and before the Title III court appointed by some large trades after COFINA defaulted and before the Title III court appointed
representatives for the debt negotiations. Prices for COFINA junior bonds representatives for the debt negotiations. Prices for COFINA junior bonds ~~fel~~ fell to nearly 10% of to nearly 10% of
par after Hurricane María, but both senior and junior bond prices began to recover at the end of par after Hurricane María, but both senior and junior bond prices began to recover at the end of
2017, and 2017, and ~~especial y~~especially after the February 2018 passage of the Balanced Budget Act of 2018 (BBA after the February 2018 passage of the Balanced Budget Act of 2018 (BBA
2018; P.L. 115-123), which provided funds for Puerto Rico. Those prices jumped sharply after an 2018; P.L. 115-123), which provided funds for Puerto Rico. Those prices jumped sharply after an
agreement on a split of COFINA revenues was announced in June 2018 and, to a lesser extent, agreement on a split of COFINA revenues was announced in June 2018 and, to a lesser extent,
once the Oversight Board announced details of the final COFINA deal. once the Oversight Board announced details of the final COFINA deal.

~~282 T he~~ 304 The Municipal Securities Municipal Securities ~~Rulemaking~~ Rulemaking Board’sBoard’s EMMA site, from which data underlyingEMMA site, from which data underlying those figures, is designedthose figures, is designed to to
limit comprehensive collection of trading data for a given issuer. limit comprehensive collection of trading data for a given issuer.
~~283 T hus~~ 305 Thus, a bar placed slightly ahead of an event might include trades made late in the week, rather than trading , a bar placed slightly ahead of an event might include trades made late in the week, rather than trading
occurring ahead of the event. occurring ahead of the event.
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Figure B-1. Trading Volumes for COFINA Bonds, 2016-2019

Source: CRS calculations based on Municipal Securities CRS calculations based on Municipal Securities Rulemaking Board EMMA data: https://emma.msrb.org/.Rulemaking Board EMMA data: https://emma.msrb.org/. CUSIPs are COFINA Subordinated (74529JHN8), and CUSIPs are COFINA Subordinated (74529JHN8), and
COFINA Senior (74529JNX9). COFINA Senior (74529JNX9).
CRS-53 link to page 65 Notes: Trade volume Trade volume aggregated by week,aggregated by week, centered on Mondays. See text ancentered on Mondays. See text and Table C-1 for information on key events. Vertical scalesfor information on key events. Vertical scales differ. Volumes include inter-differ. Volumes include inter-
dealer transactions used to execute block trades. dealer transactions used to execute block trades.
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GO and PBA Bond Prices and Trading Volumes
Figure B-2 shows prices and trading volumes for selected GO bonds from 2018 through 2020. shows prices and trading volumes for selected GO bonds from 2018 through 2020.
Figure B-3 shows that information for selected Public Building Authority (PBA) bonds. These shows that information for selected Public Building Authority (PBA) bonds. These
charts, as noted elsewhere, provide a partial view of the price and trading of GO and PBAcharts, as noted elsewhere, provide a partial view of the price and trading of GO and PBA bonds bonds
due to the degree of fragmentation of Puerto Rico’s debt structure. due to the degree of fragmentation of Puerto Rico’s debt structure.
From the time of their issuance until around the time that Hurricane María hit Puerto Rico, the From the time of their issuance until around the time that Hurricane María hit Puerto Rico, the
2014 GO bonds, issued with a provision to be governed by New York law, traded at a premium to 2014 GO bonds, issued with a provision to be governed by New York law, traded at a premium to
other GO bonds. After María, that premium vanished and GO bonds traded at similar prices, just other GO bonds. After María, that premium vanished and GO bonds traded at similar prices, just
above 20% of par (as shown iabove 20% of par (as shown in Figure 4). During 2018, those bonds’ prices rose to about 50% of ). During 2018, those bonds’ prices rose to about 50% of
par, with marked increases after enactment of the Balanced Budget Act of 2018 (P.L. 115-123) in par, with marked increases after enactment of the Balanced Budget Act of 2018 (P.L. 115-123) in
February, the April release of Oversight Board proposals for pension reductions and other February, the April release of Oversight Board proposals for pension reductions and other
changes, and the Board’s announcement of a framework for a COFINA settlement in August.changes, and the Board’s announcement of a framework for a COFINA settlement in August.~~284~~306
GO bond prices began to diverge in January 2019, when the Oversight Board and the UCC GO bond prices began to diverge in January 2019, when the Oversight Board and the UCC
~~chal enged~~challenged the validity the validity of late vintage GO bonds and PBA bonds. The 2014 GO bonds began to of late vintage GO bonds and PBA bonds. The 2014 GO bonds began to
trade at lower prices than earlier vintage GO bonds. That gap increased after GO/PBA PSA trade at lower prices than earlier vintage GO bonds. That gap increased after GO/PBA PSA
negotiations began in Aprilnegotiations began in April 2019. Sculptor Capital, a hedge fund member of the Lawful 2019. Sculptor Capital, a hedge fund member of the Lawful
Constitutional Debt Coalition, outlined four no-trade periods, beginning with the start of the PSA Constitutional Debt Coalition, outlined four no-trade periods, beginning with the start of the PSA
negotiations, and claimed that its trades of relevant bonds took place outside of those periods negotiations, and claimed that its trades of relevant bonds took place outside of those periods
(Table B-1). Some large trades in 2011 GO bonds, however, took place during the first no-trade . Some large trades in 2011 GO bonds, however, took place during the first no-trade
period, although whether those traders possessed nonpublic information is unclear. Many trades period, although whether those traders possessed nonpublic information is unclear. Many trades
also occurred soon after the end of those periods. As those periods ended when previously private also occurred soon after the end of those periods. As those periods ended when previously private
information became public, one would expect markets to react. information became public, one would expect markets to react.
Table B-1. No-Trade Periods According to Sculptor Capital
Dates
Starting and Ending Dates of No-Trade Periods
April April 22, 2019 22, 2019
Commencement Commencement of PSA negotiations of PSA negotiations
June 16, 2019 June 16, 2019
Oversight Board publishes PSA Oversight Board publishes PSA

October 2, 2019 October 2, 2019
Sculptor receives Sculptor receives ~~material~~ material nonpublic information nonpublic information
October 17, 2019 October 17, 2019
Financial data released Financial data released by FAFAAby FAFAA to EMMA and Reorg Research to EMMA and Reorg Research

October 25, 2019 October 25, 2019
Sculptor receives Sculptor receives Oversight Board proposal Oversight Board proposal
February 9, 2020 February 9, 2020
Publication of amended PSA Publication of amended PSA

August 15, 2020 August 15, 2020
Oversight Board circulates PSA proposal Oversight Board circulates PSA proposal
October 1, 2020 October 1, 2020
Oversight Board announces PSA proposals Oversight Board announces PSA proposals
Source: In re: CPR, Informative Motion of Sculptor Capital, October 26, 2020, https://cases.primeclerk.com/ In re: CPR, Informative Motion of Sculptor Capital, October 26, 2020, https://cases.primeclerk.com/
puertorico/Home-DownloadPDF?id1=OTg1Njc5&id2=0. puertorico/Home-DownloadPDF?id1=OTg1Njc5&id2=0.
Notes: Initial date indicates when parties to negotiation may have obtained material Initial date indicates when parties to negotiation may have obtained material nonpublic information. nonpublic information.
Second date notes a “cleansing event” when that information became publicly available. EMMA is the Municipal Second date notes a “cleansing event” when that information became publicly available. EMMA is the Municipal
SecuritiesSecurities Rulemaking Board’sRulemaking Board’s electronic data website. Reorg Research covers restructurings for investors. electronic data website. Reorg Research covers restructurings for investors.
GO bond spreads narrowed after the fourth no-trade period ended with the Oversight Board PSA GO bond spreads narrowed after the fourth no-trade period ended with the Oversight Board PSA
announcement. GO and PBA bond prices dipped in spring 2020, but stabilized after May 2020, announcement. GO and PBA bond prices dipped in spring 2020, but stabilized after May 2020,
when the Title III court required detailed Rule 2019(b) disclosures. when the Title III court required detailed Rule 2019(b) disclosures.

~~284 Se~~e 306 See Table C-1 for~~Table C-1~~ ~~for~~ a listing of events and links to documents. a listing of events and links to documents.
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55
Figure B-2. Price Trends and Trading Volumes for Selected GO Bonds, 2018-~~2021~~2022

Source: CRS calculations based on the Municipal SecuritiesCRS calculations based on the Municipal Securities ~~Rulemaking~~ Rulemaking Board EMMA site:Board EMMA site: https://emma.msrb.org/.https://emma.msrb.org/. CUSIPs are 2006A (74514LHN0), 2009B CUSIPs are 2006A (74514LHN0), 2009B
(74514LVW4), 2011A GO (74514LYW1), 2012A (74514LA98), and 2014A NY Law GO (74514LE86). (74514LVW4), 2011A GO (74514LYW1), 2012A (74514LA98), and 2014A NY Law GO (74514LE86).
CRS-56 link to page 65 Notes: See text See text andand Table C-1 for information on key events. Trade volumes are summedfor information on key events. Trade volumes are summed by week,by week, centered on Mondays. Vertical scales differ.centered on Mondays. Vertical scales differ. Light grey areas Light grey areas
denote no-trade periods as described by Sculptor Capital. Volumesdenote no-trade periods as described by Sculptor Capital. Volumes include inter-dealerinclude inter-dealer transactions used to execute block trades. transactions used to execute block trades.
CRS- CRS-51

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57
Figure B-3. Selected Puerto Rico Building Authority Bond Price Trends and Trading Volumes, 2018-2020

Source: CRS calculations based on the Municipal SecuritiesCRS calculations based on the Municipal Securities ~~Rulemaking~~ Rulemaking Board EMMA site:Board EMMA site: https://emma.msrb.org/. https://emma.msrb.org/.
CRS-58 link to page 65 Notes: See text See text andand Table C-1 for information on key events. Trade volumes are summedfor information on key events. Trade volumes are summed by week,by week, centered on Mondays. Vertical scalescentered on Mondays. Vertical scales differ.differ. Light grey areas Light grey areas
denote no-trade periods as described by Sculptor Capital. Volumesdenote no-trade periods as described by Sculptor Capital. Volumes include include ~~inter-dealer~~ interdealer transactions used to execute block trades. transactions used to execute block trades.
CRS- CRS-5259

link to page link to page 5765 Puerto Rico’s Public Debts: Accumulation and Restructuring

Appendix C. Chronology of Selected Events
Table C-1 lists many key events in the restructuring of Puerto Rico’s public debts. lists many key events in the restructuring of Puerto Rico’s public debts.
Table C-1. Selected Chronology of Puerto Rico’s Debt Restructuring
Items are in reverse chronological order and include links to supporting documents Items are in reverse chronological order and include links to supporting documents
Date
Action
~~2021~~

~~July 13, 2021~~
~~Title III Court hearing on CPR plan disclosure statement~~
~~May 11, 2021~~
~~Oversight Board reaffirms~~ 2022 March 15, 2022 Exchange of old bonds for new and other plan actions consummated February 3, 2021 Oversight Board Executive Director Natalie Jaresko resigns, effective April 1, 2021 January 17, 2022 Plan of Adjustment for CPR and related entities confirmed 2021 December 21, 2021 Modified 8th Amended Plan of Adjustment released November 2021 Hearings in Title III Court on confirmation of plan for CPR and related entities October 25, 2021 Act 53-2021 (PC 1003) enacted after negotiations among legislators, governor, and Board October 2021 Puerto Rican legislature considers measure (PC 1003) to permit issue of new bonds August 2, 2021 Disclosure Statement Order issued July 30, 2021 7th Amended Plan of Adjustment released July 27, 2021 Oversight Board reaches agreement with Ambac Assurance and Financial Guaranty Insurance Company July 13-14, 2021 Title III Court hearings on CPR plan disclosure statement July 12, 2021 Oversight Board reaches agreement with Unsecured Creditors Committee (UCC) May 11, 2021 Oversight Board reaffirms support for PREPA restructuring plan support for PREPA restructuring plan
May 5, 2021 May 5, 2021
Oversight Board, and CPR announce plan support agreement Oversight Board, and CPR announce plan support agreement with bond insurerswith bond insurers Assured and NPFG to resolve to resolve
clawback issuesclawback issues related to HTA and certain other public corporations related to HTA and certain other public corporations
May 4, 2021 May 4, 2021
Title III Court schedules hearing on adequacy of information in disclosure Title III Court schedules hearing on adequacy of information in disclosure statement for statement for
restructuring of debts of CPR and related entities restructuring of debts of CPR and related entities
April April 12, 2021 12, 2021
Oversight Board announces agreement in principle with bond insurers Oversight Board announces agreement in principle with bond insurers
March 8, 2021 March 8, 2021
Oversight Board announces progress Oversight Board announces progress in ERS negotiations; files disclosurein ERS negotiations; files disclosure statement for CPR statement for CPR
and related debt with Title III court and related debt with Title III court
February 23, 2021 February 23, 2021
Oversight Board releases Oversight Board releases amended PSA proposal for CPR and related debt amended PSA proposal for CPR and related debt
February 10, 2021 February 10, 2021
Title III court deadline for FOMB to present outline for CPR/ERS/PBA/etc. plan; Title III court deadline for FOMB to present outline for CPR/ERS/PBA/etc. plan;
Board asks for delay and announces an “agreement in principle” Board asks for delay and announces an “agreement in principle”
January 6, 2021 January 6, 2021
David Skeel, David Skeel, Jr. and Arthur J. González reappointed to the OversightJr. and Arthur J. González reappointed to the Oversight Board Board
January 2, 2021 January 2, 2021
Pedro Pierluisi Pedro Pierluisi Urrutia inaugurated as GovernorUrrutia inaugurated as Governor of Puerto Ricoof Puerto Rico
2020

December December 14, 2020 President states intention to name Antonio Medina Comas to Oversight Board 14, 2020 President states intention to name Antonio Medina Comas to Oversight Board
DecemberDecember 8, 2020 8, 2020
President appoints John Nixon and Betty Rosa, reappoints Andrew Biggs to Oversight Board President appoints John Nixon and Betty Rosa, reappoints Andrew Biggs to Oversight Board
October 29, 2020 October 29, 2020
Title III Court sets February 2021 date for Oversight Board to outline term sheet for Title III Court sets February 2021 date for Oversight Board to outline term sheet for
amended plan amended plan
October 28, 2020 October 28, 2020
Title III Court Omnibus hearing; Judge Swain denies motion of National Public Finance Title III Court Omnibus hearing; Judge Swain denies motion of National Public Finance
Guarantee for an investigation of possibleGuarantee for an investigation of possible insider trading; asks Oversight Board to submit insider trading; asks Oversight Board to submit
term sheet for GO and PBA restructuring by February 10, 2021. term sheet for GO and PBA restructuring by February 10, 2021.
Congressional Research Service 60 Puerto Rico’s Public Debts: Accumulation and Restructuring Date Action October 21, 2020 October 21, 2020
Chairman Grijalva et al. ask Oversight Board to investigate insider trading Chairman Grijalva et al. ask Oversight Board to investigate insider trading ~~al egations~~allegations
October 15, 2020 October 15, 2020
LDCD objection to National Public Finance Guarantee motion LDCD objection to National Public Finance Guarantee motion
October 13, 2020 October 13, 2020
Ad Hoc GO Group objection to National Public Finance Guarantee motion Ad Hoc GO Group objection to National Public Finance Guarantee motion
October 13, 2020 October 13, 2020
QTCB Group objection to National Public Finance Guarantee motion QTCB Group objection to National Public Finance Guarantee motion
October 9, 2020 October 9, 2020
Justin Peterson appointed to Oversight Board Justin Peterson appointed to Oversight Board
October 6, 2020 October 6, 2020
David Skeel, David Skeel, Jr. selected as OversightJr. selected as Oversight Board Chair; formerBoard Chair; former Chair José Carrión III steps down Chair José Carrión III steps down
October 5, 2020 October 5, 2020
National Public Finance asks Title III Court for investigation of insider National Public Finance asks Title III Court for investigation of insider ~~trading al egations~~ trading allegations
October 1, 2020 October 1, 2020
FOMB Announces PSA proposals for CPR and related debt FOMB Announces PSA proposals for CPR and related debt
August 15, 2020 August 15, 2020
FOMB Circulates PSA proposal FOMB Circulates PSA proposal
August 5, 2020 August 5, 2020
Five Members Five Members of House NY Delegation send letterof House NY Delegation send letter to NY State Attorney General to NY State Attorney General
July 2, 2020 July 2, 2020
Title III Court rules against HTA, other revenue bond holders. Title III Court rules against HTA, other revenue bond holders.
July 1, 2020 July 1, 2020
Oversight Board Chair José Carrión and Board Member Oversight Board Chair José Carrión and Board Member Carlos García to step down. Carlos García to step down.
June 8, 2020 June 8, 2020
Judge Swain orders compliance Judge Swain orders compliance with Federal Rule of Bankruptcy Procedurewith Federal Rule of Bankruptcy Procedure 2019(b) 2019(b)
disclosures disclosures
May 21, 2020 May 21, 2020
Amended PSA for CPR, PBA, Amended PSA for CPR, PBA, ERS, etc. ~~ERS, etc.~~
~~Congressional Research Service~~

53

~~Puerto Rico’s Public Debts: Accumulation and Restructuring~~

~~Date~~
~~Action~~
May 26, 2020 May 26, 2020
Title III Court Opinion & Order Title III Court Opinion & Order Re: UCC et al. Motion 2019(b) disclosures Re: UCC et al. Motion 2019(b) disclosures
March 2, 2020 March 2, 2020
Correspondence Correspondence ~~al eging~~alleging insider insider trading among GO creditorstrading among GO creditors filed on CPR docket (C.Long, filed on CPR docket (C.Long,
Feb. 25, 2020 letter) Feb. 25, 2020 letter)
February 28, 2020 February 28, 2020
Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico
February 28, 2020 February 28, 2020
Disclosure Disclosure Statement for Amended Title III Plan Statement for Amended Title III Plan
February 25, 2020 February 25, 2020
Unsecured Creditors Committee Unsecured Creditors Committee asks for moreasks for more specific Federalspecific Federal Rule of Bankruptcy Rule of Bankruptcy
Procedure 2019(b) disclosures; Procedure 2019(b) disclosures; ~~al eges~~alleges suspicious trading activity by parties to GO mediation suspicious trading activity by parties to GO mediation
February 9, 2020 February 9, 2020
Amended Plan Support Agreement Amended Plan Support Agreement for CPR, PBA, ERS, etc. “The PSA was signed by the for CPR, PBA, ERS, etc. “The PSA was signed by the
holders of approximately $8 bil ionholders of approximately $8 bil ion in claimsin claims of GO Bonds and PBA bonds. The PSA also of GO Bonds and PBA bonds. The PSA also
~~al ows~~allows each holder of GO Bonds or PBA Bonds with a face amount of such bonds in excess each holder of GO Bonds or PBA Bonds with a face amount of such bonds in excess
of one mil ionof one mil ion dol arsdol ars to join the PSA. Since its execution, holdersto join the PSA. Since its execution, holders of an additional $2 bil ion of an additional $2 bil ion
in GO Bonds or PBA Bonds have joined the PSA.” Amd. Discl.in GO Bonds or PBA Bonds have joined the PSA.” Amd. Discl. Stmt. p. 8 Stmt. p. 8
January 16, 2020 January 16, 2020
“Apparently a deal was reached . “Apparently a deal was reached . ~~.in~~ . in mediation which was widelymediation which was widely known among municipal known among municipal
bond dealersbond dealers and their institutional clients” C.Long letter,and their institutional clients” C.Long letter, Feb. 25, 2020 Feb. 25, 2020
2019

October 17, 2019 October 17, 2019
EMMA and Reorg Research publish financial data from AAFAF EMMA and Reorg Research publish financial data from AAFAF
September September 27, 2019 Oversight Board commences27, 2019 Oversight Board commences PBA Title III case PBA Title III case
SeptemberSeptember 27, 2019 Oversight Board proposes initial plan of adjustment for CPR, ERS, etc. 27, 2019 Oversight Board proposes initial plan of adjustment for CPR, ERS, etc.
SeptemberSeptember 11, 2019 Title III Court order re: Mediation confidentiality restrictions 11, 2019 Title III Court order re: Mediation confidentiality restrictions
August 7, 2019 August 7, 2019
Wanda Vázquez Garced, the Puerto Rican Justice Minister, Wanda Vázquez Garced, the Puerto Rican Justice Minister, sworn in as Governor sworn in as Governor
August 7, 2019 August 7, 2019
Puerto Rico’s Puerto Rico’s Supreme Court rulesSupreme Court rules succession violates PR Constitution succession violates PR Constitution
August 2, 2019 August 2, 2019
Gov. Ricardo Gov. Ricardo ~~Rossel ó’s~~ Rosselló’s resignation effective, replaced by Pierluisi resignation effective, replaced by Pierluisi
July 31, 2019 July 31, 2019
H Nat Resources Chairman Raúl Grijalva H Nat Resources Chairman Raúl Grijalva circulates PROMESA discussion draft circulates PROMESA discussion draft
July 24, 2019 July 24, 2019
Title III Court orders stay on specified Title III Court orders stay on specified litigation litigation
July 18, 2019 July 18, 2019
UCC files UCC files ~~chal enges~~ challenges to PBA bonds to PBA bonds
June 16, 2019 June 16, 2019
Executed Plan Support Agreement Executed Plan Support Agreement
June 16, 2019 June 16, 2019
FOMB Publishes Plan Support Agreement FOMB Publishes Plan Support Agreement
June 7, 2019 June 7, 2019
Plan Support Agreement Plan Support Agreement (“Retiree(“Retiree ~~Committee~~ Committee PSA”) PSA”)
June 7, 2019 June 7, 2019
Plan Support Agreement Plan Support Agreement (“AFSCME PSA”) Congressional Research Service 61 Puerto Rico’s Public Debts: Accumulation and Restructuring Date Action ~~(“AFSCME PSA”)~~
May 31, 2019 May 31, 2019
Oversight Board reaches agreements Oversight Board reaches agreements (Plan Support Agreement)(Plan Support Agreement) with certain creditor with certain creditor
groups: Retiree Committee,groups: Retiree Committee, AFSCME, PBA & CPR GO bondholders AFSCME, PBA & CPR GO bondholders
April April 22, 2019 22, 2019
Commencement Commencement of GO PSA Negotiations of GO PSA Negotiations
February 5, 2019 February 5, 2019
Plan of adjustment for COFINA confirmed Plan of adjustment for COFINA confirmed by Title III Court by Title III Court
January 14, 2019 January 14, 2019
Oversight Board and UCC Oversight Board and UCC ~~chal enge~~challenge validity of GO bonds issued after 2011 validity of GO bonds issued after 2011
2018

August 30, 2018 August 30, 2018
Board approves Plan Support Agreement Board approves Plan Support Agreement for COFINA for COFINA
August 20, 2018 August 20, 2018
Kobre & Kim Kobre & Kim ~~issues commissioned review~~ issues commissioned review of the Government’sof the Government’s debt debt
August 8, 2018 August 8, 2018
Board announces deal with senior & junior COFINA creditors, Board announces deal with senior & junior COFINA creditors, bond insurers bond insurers
July 5, 2018 July 5, 2018
Gov. Ricardo Gov. Ricardo ~~Rossel ó~~ Rosselló Nevares sues Oversight Board Nevares sues Oversight Board
April April 18, 2018 18, 2018
Oversight Board releases Oversight Board releases proposed Fiscalproposed Fiscal Plans with pension reductions, laborPlans with pension reductions, labor law changes, law changes,
regulatory changes regulatory changes
February 9, 2018 February 9, 2018
Balanced Budget Act of 2018 (BBA 2018; P.L. 115-123) enacted: provides emergency Balanced Budget Act of 2018 (BBA 2018; P.L. 115-123) enacted: provides emergency
response funds response funds
2017 September

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~~Date~~
~~Action~~
~~2017~~

~~September~~ 2017 2017
Hurricanes Irma and María hit Puerto Rico Hurricanes Irma and María hit Puerto Rico
July 2, 2017 July 2, 2017
Oversight Board commences Oversight Board commences PREPA Title III case PREPA Title III case
May 21, 2017 May 21, 2017
Oversight Board commences Oversight Board commences HTA Title III case HTA Title III case
May 5, 2017 May 5, 2017
Oversight Board commences Oversight Board commences COFINA Title III case COFINA Title III case
May 5, 2017 May 5, 2017
Oversight Board commences Oversight Board commences ERS Title III case ERS Title III case
May 3, 2017 May 3, 2017
Oversight Board commences Oversight Board commences CPR Title III case CPR Title III case
February 15, 2017 February 15, 2017
Original expiration date for PROMESA stay: extended 75 days Original expiration date for PROMESA stay: extended 75 days

Source: Compiled Compiled by CRS. by CRS.

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Appendix D. Table of Common Acronyms
Table D-1. ~~Puerto Rico~~ Table of Common Acronyms
Spanish
Acronym
Full Name
Acronym
Full Spanish Name
COFINA COFINA
Puerto Rico Sales Tax Financing Puerto Rico Sales Tax Financing
COFINA COFINA
Corporación del Fondo de Interés Corporación del Fondo de Interés
Corporation Corporation
Apremiante Apremiante de Puerto Rico de Puerto Rico
CPR CPR
Commonwealth Commonwealth of Puerto Rico of Puerto Rico
ELA ELA
Estado Libre Asociado de Puerto Rico Estado Libre Asociado de Puerto Rico
ERS ERS
Puerto Rico Employees Puerto Rico Employees Retirement Retirement
ASR ASR
Administración Administración ~~de los Sistemas~~ de los Sistemas de de
System System
Retiro de los Retiro de los Empleados del Gobierno Empleados del Gobierno
y la Judicatura y la Judicatura
FAFAA FAFAA
Puerto Rico Fiscal Agency and Puerto Rico Fiscal Agency and
AAFAF AAFAF
Autoridad de Asesoría Autoridad de Asesoría Financiera y Financiera y
Financial Advisory Authority Financial Advisory Authority
Agencia Fiscal Agencia Fiscal
GDB GDB
Government Development Government Development Bank Bank
BGF BGF
Banco Gubernamental de Fomento Banco Gubernamental de Fomento
GO GO
General General obligation bond obligation bond
— —
— —
LCDC LCDC
Lawful Constitutional Debt Coalition Lawful Constitutional Debt Coalition
— —
— —
Oversight Oversight
Financial Oversight and Management Financial Oversight and Management
JSF JSF
La Junta de Supervisión La Junta de Supervisión Fiscal Fiscal
Board, FOMB Board, FOMB
Board Board
PBA PBA
Puerto Rico Public Buildings Puerto Rico Public Buildings
AEP AEP
Autoridad de Edificios Públicos Autoridad de Edificios Públicos
Authority Authority
P3 P3
Public-Private Partnerships Authority Public-Private Partnerships Authority
Autoridad para las Alianzas Público- Autoridad para las Alianzas Público-
AAPP AAPP
Privadas Privadas
PRASA PRASA
Puerto Rico Aqueduct & Sewer Puerto Rico Aqueduct & Sewer
AAA AAA
Autoridad de Acueductos y Autoridad de Acueductos y
Authority Authority
Alcantaril ados Alcantaril ados
PREPA PREPA
Puerto Rico Electric Power Authority Puerto Rico Electric Power Authority
AEE AEE
Autoridad de Energía Eléctrica Autoridad de Energía Eléctrica
PRHTA PRHTA
Puerto Rico Highways & Puerto Rico Highways &
ACT ACT
Autoridad de Carreteras Autoridad de Carreteras y y
Transportation Authority Transportation Authority
Transportación Transportación
PROMESA PROMESA
Puerto Rico Oversight, Management, Puerto Rico Oversight, Management,
and Economic Stability Act (P.L. 114-and Economic Stability Act (P.L. 114-
— —
— —
187) 187)
PSA PSA
Plan Support Agreement Plan Support Agreement
— —
— —
SUT SUT
Sales and Use Tax Sales and Use Tax
IVU IVU
Impuesto sobre Ventas y Uso Impuesto sobre Ventas y Uso
UCC UCC
Unsecured Creditors Committee Unsecured Creditors Committee
— —
— —
Source: Compiled Compiled by CRS. by CRS.
Note: In some cases, In some cases, such as COFINA, the Spanish acronym is such as COFINA, the Spanish acronym is ~~typical y~~typically used. used.

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Author Information

D. Andrew Austin D. Andrew Austin

Analyst in Economic Policy Analyst in Economic Policy

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