Broken Island, Costly Bankruptcy

Nov 2, 2018
8:28 AM
Originally published at Centro de Periodismo Investigativo

From the April 19, 2018 meeting of the Financial Oversight and Management Board for Puerto Rico (Photo by the Centro de Periodismo Investigativo)

By Luis J. Valentín Ortiz

Versión en español aquí.

Puerto Rico’s bankruptcy has cost its people more than $225 million in a year, and that’s just for lawyers and financial consultants. The expense in restructuring professional services is projected to surpass $1.2 billion by 2023, including the budget of the island’s federally-imposed Fiscal Control Board.

I suggested to my editor sentences such as these as possible leads for a series of stories about the billing in professional services as part of the Puerto Rico government’s bankruptcy process. I didn’t succeed. When talking about hundreds of millions of dollars, these figures alone fall short in showing the magnitude of the matter. My editor explained it to me and I understood why.

Here is a better way to word it: There are lawyers and consultants working on the U.S. territory’s bankruptcy that bill in a month —sometimes in a week— what the average Puerto Rican family makes in a year, roughly $20,000. That’s called inequality.

Puerto Rico’s bankruptcy executives often visit the island with all their expenses paid. From different cities in the United States, they arrive at Hato Rey’s federal court building in black SUVs, sometimes directly from the airport whenever there is a hearing. You see them walking under the shiny Caribbean sun, with their rolling briefcases stumbling all along the sidewalks of Avenida Chardón.

Around 1,000 people —lawyers, law clerks and financial consultants, among many others—  working from more than 30 firms work on Puerto Rico’s bankruptcy, and their fees are paid by government coffers. Hundreds more advise and invoice from the sidelines, without being required to go through the evaluation of the court. It is a multimillion dollar operation that skims a bankrupt country living without expectations that things will recover soon. Of the more than $225 million that has been billed so far, 98% goes to U.S. firms. It is money that fails to flow into the local economy, beyond the coffee or the taxi paid while visiting Puerto Rico (both covered by the government as reimbursable expenses.)

Puerto Rico’s Bankruptcy Executives chronicles the main players in the game, many of whom go from bankruptcy to bankruptcy, from restructuring to restructuring, seeing each other’s faces over and over again. In Puerto Rico, most of them operate behind the scenes. Some design and implement the fiscal plans and their “structural reforms.” Others litigate in court or sit at the negotiating table. Some analyze the numbers and come up with the projections. A few engineer the “solutions” to the island’s fiscal and economic crisis.

Granted, the process is novel and complex. Other creditors have their own group of deluxe lawyers and there is no precedent to what is being sought: restructuring in a “sustainable” manner, some $120 billion in public debt and unfunded pension obligations. It is by far the largest government bankruptcy in the history of the U.S. municipal bond market and its cost is more often compared to the corporate bankruptcies of Lehman Brothers and Enron than to cities such as Detroit or Jefferson County, Alabama.

Perhaps most overlooked is the irony: A bankrupt jurisdiction, with a crippled economy and the highest level of poverty under the U.S. flag, has to foot this tab. For a lawyer who has billed almost $1 million at the expense of the Puerto Rican people, requests reimbursement of the $5 cancellation fee of an Uber ride or a movie charge while staying in a hotel. And when adding all the coffees and meals billed as part of the bankruptcy process, almost $500,000, the government pays the annual salary of at least 15 police officers. That the maximum reimbursement of $40 for each breakfast, lunch and dinner out of the office for these professionals, equals to what the majority of Puerto Ricans spend in food in two or more days.

Add to this the constant warnings made by Brady Williamson, the fee examiner appointed by the court as part of Puerto Rico’s bankruptcy cases: overbilling, automatic rate increases, “misjudgments,” lack of details in invoices, duplication of services—often attributed to the dual representation of the government and the fiscal board. Each side has its own law firms, financial consulting firms and other advisers. They justify the expenses because they disagree on certain issues, but Williamson has repeatedly stated that efforts are being duplicated. Yet paychecks keep coming out.

In his last report to the court issued in this week, the fee examiner reiterated that overbilling problems continue and warned that he will begin to raise objections over the invoices filed by restructuring professionals. So far, Williamson has not done so and has only forced reductions of around 2% of total billing.

During a recent interview with the Center for Investigative Journalism (CPI), I asked the board’s executive director, Natalie Jaresko, about the fact that multiple law firms and consulting companies are working on the same issues. She washed her hands of it. Jaresko said she would not comment on the government and its use of lawyers and consultants. She further added that the board’s “independence” and the complexity of the matter calls for “different perspectives.”

“All of this is going to be worth the money,” said Jaresko, with an optimism that reminds some of a a credit card company’s “Priceless” commercials.

Recently, both the board and legislative leaders went after each other over how much it costs Puerto Rico residents to finance their operations. According to the island’s certified fiscal plan, the Legislature costs each resident at about $34 annually, while the figure for the board’s budget and professionals working on Puerto Rico’s bankruptcy —including those retained by the elected government— hovers around $70.

In addition, the cost of the island’s bankruptcy goes beyond these fess from lawyers and consultants. How many pensioners will lose their benefits due to cuts? How much it will cost public employees who leave the government? How much will each bondholder lose (or win)? How many cuts to public services? How can we quantify the social impact of Puerto Rico’s bankruptcy?

Beyond the estimates and political calculations given by one side or the other, it will take years before having any idea of how much this process will cost Puerto Ricans. Judging by how things are going, the cost of the island’s bankruptcy —with a public debt issued irresponsibly and potentially illegally, according to a board-commissioned report— is a bottomless pit.