Spanish version here.
Martin Bienenstock sits in the audience, looking at his tablet. As the twelfth public meeting of Puerto Rico’s Fiscal Control Board takes place, he raises his eyes, adjusts his glasses, frowns and pays attention to the discussion. Nothing seems to happen and his eyes go back to the electronic device.
Bienenstock, a partner at New York-based Proskauer Rose, is a well-known lawyer in the corporate restructuring industry. With almost 40 years of experience, he has participated in many of the largest bankruptcies in the U.S., including a key role in the restructuring of General Motors and Chrysler, and representing now-defunct Enron in its Chapter 11 bankruptcy.
His biography highlights how Bienenstock has been a staple for the past decade on the National Law Journal’s list of the 100 Most Influential Bankruptcy Lawyers, as well as an “MVP” among bankruptcy lawyers, according to Law 360.
Since late 2016, Bienenstock leads the legal counsel of Puerto Rico’s federally appointed board, particularly in the bankruptcy cases filed under Title III of PROMESA. From May 2017 to June 2018, he dedicated more than 1,500 hours to Puerto Rico’s bankruptcy. Each minute of Bienenstock costs $12.65, and for his work, he has invoiced more than $1.3 million for the one-year period. Bienenstock didn’t answer a request for comment made by the Center for Investigative Journalism (CPI by its Spanish initials).
Bienenstock and the Proskauer team are part of a web that comprises hundreds of contractors who provide professional services to the Board. More than 200 lawyers, consultants and other contractors (Puerto Rico’s bankruptcy executives) make up the workforce of the entity imposed by the federal government through the PROMESA law, according to contracts and billing examined by the CPI. To date, Puerto Rico taxpayers have paid at least $80 million in expenses related to the Board. The entity’s budget for this fiscal year would add more than $60 million to the bill.
The Board’s executive director, Natalie Jaresko, argued that the entity is “very select, very careful” in controlling spending on “world-class” professional services.
“Puerto Rico’s problems are very complex. They are unique. They require the best-in-class solutions. When you look at that fiscal plan, you see it wasn’t written by somebody that had a couple of ideas,” she said during an interview with the CPI, justifying the spending in professional services, while underlining that the Board is a “temporary organization.”
Jaresko, nevertheless, “can’t say” how long will the Board remain in place and with it, the use of taxpayers’ money in spending related to the fiscal panel.
“Well, we need four years of fiscal balance. We haven’t gotten there yet. So, minimum, four [more years],” she said.
As with many of the companies and law firms working in the bankruptcy of Puerto Rico, Proskauer knows its client well. In 2014, then Governor Alejandro García Padilla retained Bienenstock and the New York-based law firm to draft a local bankruptcy law, a legislative attempt by the commonwealth government to have access to a court-ordered municipal bankruptcy regime. It failed. In the summer of 2016, the U.S. Supreme Court ruled against the local government and struck down the controversial legislation. It said federal law preempts this field, even if Puerto Rico had no access to Chapter 9 of the U.S. Bankruptcy Court. Congress then moved to approve PROMESA, an experimental law that is put to test every day.
For Gerardo Carlo Altieri, a former federal bankruptcy judge, the restructuring of Puerto Rico’s debt is unique in U.S. history; a “megacase” for the likes of Detroit, Argentina, Greece, Jefferson County (Alabama), Orange County and San Bernardino (California). It also shares many of the lawyers and consultants who worked these debt restructurings.
“This is a group of extremely specialized lawyers who go around the world to deal with these government insolvency cases and they charge a lot of money. This was already known,” Carlo Altieri said.
Fees Exceed Initial Projections
What turned out to be unexpected, according to the former bankruptcy judge, was the duplicity seen in consulting and legal services. Far from sharing lawyers and consultants, the Board and the Puerto Rican government retain their own firms to work on each fiscal task.
“I can’t speak to what the government does with its consultants and whether it uses civil servants or employees,” said Jaresko, when asked what the Board is doing to control spending by the Ricardo Rosselló Nevares administration for these services. She noted that in some cases, the federal court has required the government to have its own lawyers and consultants. PROMESA states that the fiscal panel is the commonwealth’s sole representative in the court-ordered bankruptcy process.
Jaresko continued: “The Board is created to be independent and you do need an independent view. I don’t think that those who in the past, I’m not naming an institution, have been responsible for underfunding the pension systems ought to be writing the plan on the pension systems. That would be nonsensible. You do need different perspectives….”
So, should the Board stay away from hiring the same advisers who participated in the government’s past fiscal decisions?
“No, I can’t say that. What I’m saying is you don’t want simply those people to tell you. You want people with experience at the table. You don’t want only people that have never seen Puerto Rico and come from somewhere else. It’s the mixture of ideas. It’s the combination of experiences, both within and outside Puerto Rico, that will bring us to the best possible solutions,” Jaresko said.
The Board has about a dozen law firms under contract, in addition to 12 other consulting firms. Hourly rates for these professionals mostly hover around $700. In Puerto Rico, a bankrupt jurisdiction, the average weekly salary barely exceeds $500, according to recent data from the U.S. Bureau of Labor Statistics.
For economist and professor Heriberto Martínez Otero, there is a duplicity “or triplicity, if that word exists,” in lawyers and consultants, with the majority of these salaries leaving the Island and not staying within the local private sector. “They cut down on payroll and social services, but the procurement of [professional] services has gone off,” said Martínez Otero.
As part of PROMESA’s legislative process, the Congressional Budget Office (CBO) estimated related expenditures at $370 million during a 10-year period, until 2026. Yet actual spending would be very far from the CBO’s figure.
Both the Puerto Rican government and the Board project that spending related to Puerto Rico’s debt restructuring will top roughly $1.4 billion within the next six years. This amount exceeds the entire budget of the local Health Department, which is $935 million.
The CPI questioned the CBO whether it is concerned with the gap between its projections and expenses paid so far, to which the federal agency replied it had no further comment in addition to the 2016 report it published about PROMESA.
A Parallel Government?
In conjunction with Proskauer, consulting firms McKinsey & Co., Ernst & Young and Citi Global Markets directly influence the Board’s most important decisions. They provide, develop and execute the “solutions” to the island’s fiscal crisis and debt restructuring. They advise on macroeconomic projections and cash management to infrastructure projects, budgets and fiscal plans.
For these four firms, the people of Puerto Rico will pay more than $60 million in a one-year period.
The tasks for McKinsey, a consulting firm based in New York, include the review of economic and financial projections of Puerto Rico; development and execution of fiscal plans; liquidity management before and after Hurricane María; bankruptcy cases in federal court; coordination of the Board’s public hearings; compliance with fiscal measures; conversations with creditors and federal agencies, such as the U.S. Treasury and the evaluation of the Government’s tax proposals, among other tasks.
The firm also coordinates the Board’s work schedule and advises on proposed cuts to the Department of Corrections and the Police Bureau, as well as the consolidation of government agencies and the restructuring of the Puerto Rico Electric Power Authority (PREPA). In the post-Irma and María days, McKinsey interviewed travelers at Luis Muñoz Marín International Airport to obtain information about the number of people leaving the island after the September hurricanes.
In education, McKinsey worked on the closure plan for public schools. Billing reviewed by the CPI also shows similar work to the Board regarding the consolidation of government agencies and changes to the public health system promoted by Governor Rosselló Nevares.
As for Citi Global Markets —a subsidiary of the bank that served as underwriter for the Puerto Rican government in several debt transactions— it advises on the debt-restructuring process and leads the PREPA’s privatization efforts. The financial institution would receive $24 million once the private sector takes over the distribution and transmission systems, as well as generation assets of the troubled utility.
When CPI asked whether consultants such as McKinsey and Citi work directly in the operation of public entities such as PREPA, Jaresko insisted that they are “working on the fiscal plan, period,” while conceding later that the document does include operational aspects of Puerto Rico’s entities.
Increasing Its Size, Expenses
The Board will spend more money according to this fiscal year budget, which began July 1. Its budget now totals $64.5 million, an increase of 8% compared to the previous year, when it stood at $60 million. Transportation expenses, for instance, will triple, as well as equipment purchases.
“This is the beginning of the first full year of monitoring and implementation of the fiscal measures, the structural reforms, and yes, we are adding staff. With the completion of the new fiscal plan, which reflects the post-María environment, we are much more actively engaging in the debt negotiations. When you say ‘travel,’ much of the debt negotiations, unfortunately or fortunately, happens in New York,” argued Jaresko, during the interview at the Board’s offices at 288 Muñoz Rivera in the financial district of Hato Rey.
On the building’s 11th floor, there are still empty spaces and signs of remodeling. Some equipment and furniture are still in boxes. A stand-up banner in front of one of the offices reads, “Puerto Rico Will Shine Again.” The entity rents the space to the Puerto Rican government. The Board also has offices at 26 Federal Plaza, at the Jacob Javits Federal Building in Manhattan.
The Board has a total of 18 employees, a spokesperson for the entity confirmed in writing. He added that an office slated to open in Washington, D.C., wasn’t part of the Board’s immediate future.
Yet the entity’s current budget does include the opening of the Washington office, as well as 11 new positions, for a total of 29 full-time employees. Payroll expenses would total about $4.1 million this fiscal year, 40% more than the previous year ($2.9 million). Jaresko ($625,000 annually), Revitalization Coordinator Noel Zamot ($325,000) and in-house counsel Jaime El Koury ($225,000) sit atop the Board’s payroll list.
A list of employees published in November 2017 includes Rosemarie “Maí” Vizcarrondo Carrión ($120,000) as chief of staff, the same position she held at the office of the former Resident Commissioner Pedro Pierluisi. She is related to Pierluisi’s wife, María Elena Carrión, and Board Chairman, José Carrión. Others included in the staff list are Restructuring Director Armando Silva ($150,000), who worked until December on the Board and was previously in Citi; Miguel Tulla ($150,000), Fiscal & Implementation director and a former employee at V2A, a firm that advises the Government and deputy in-house counsel Kyle Rifkind ($100,000).
According to social network LinkedIn, the staff also includes Alejandro Figueroa, who identifies himself as manager of transformation of PREPA. Until last June, Figueroa was general counsel of the Puerto Rico Energy Commission, where he played a key role in the lawsuit filed by the regulator against the Board. Edgar Arroyo (restructuring associate), Sergio Rodríguez (financial analyst), Jean Carlos Rodríguez (restructuring associate) and Sebastián Negrón Reichard (deputy chief of staff) also name the Board as their employer on their LinkedIn profiles.
At press time, the Board had yet to provide the CPI with an updated version of its payroll list. (For a Spanish version of who is connected to the Board, click here.)
Bienenstock, Proskauer’s lawyer, is not the only familiar face at the Board’s twelfth public meeting. In the back of the room, in the last rows, is Pierluisi, Puerto Rico’s former resident commissioner who currently works at O’Neill & Borges, a local law firm retained by the Board.
According to the invoices filed by the San Juan-based law firm, the former Secretary of Justice and Resident Commissioner —a key player in the legislative approval of PROMESA— actively participates in negotiations with Puerto Rico creditors. He also advises on the fiscal plan, including the labor reform that the Board requested, as well as on the “transformation” of power utility PREPA. Pierluisi has passed judgment on some of Governor Rosselló Nevares’ fiscal measures, such as the tax reform, which has yet to be approved amid various delays since it was first announced by the administration.
As a member of O’Neill & Borges, Pierluisi charges $390 per hour. The CPI tried to contact Pierluisi for comment, but he didn’t respond.
Also working closely with the island’s fiscal crisis since before the enactment of PROMESA and the commonwealth’s bankruptcy process is Adam Chepenik, a partner at Ernst & Young. Roughly four years ago, Chepenik served as one of the main federal officials in the U.S. Treasury who worked on the Puerto Rico fiscal issue, under the direction of then Secretary Jacob Lew and President Barack Obama. Now, as an Ernst & Young employee, he is one of the Board’s top consultants, billing more than $500,000 over a one-year period. Kent Hiteshew, another former employee of the U.S. Treasury and key player on the approval of PROMESA, also works at Ernst & Young.
The Board’s lead economist, Andrew Wolfe, is a former employee of the International Monetary Fund who worked with economist Anne Krueger on the famous Krueger Report, a road map for many of the public policy decisions made by the García Padilla and Rosselló Nevares administration, as well as the Board. The release of the document in the summer of 2016 was one of the first instances in which the Puerto Rican government admitted its insolvency and sought to draw a fiscal and economic future for the Island, mainly anchored in austerity policies.
The CPI has a pending lawsuit against the Board to gain access to public documents exchanged between the entity and the Puerto Rico and federal governments.
Editor’s note: This is the first of a three-story series.