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Puerto Rico Government Spends More Than Fiscal Control Board in Bankruptcy Lawyers and Financial Consultants

While the attorneys and consultants of Puerto Rico’s Fiscal Control Board provide restructuring services and financial advice, the Government of Puerto Rico depends on its own squad of law firms and advisers, some of them former public officials who took part of the fiscal decisionmaking that led to the island’s fiscal woes.

18 agosto, 2018

Shortly after noon on Wednesday, July 25, lawyers who represent the Government Puerto Rico and its Fiscal Control Board ate at separate tables in the cafeteria of the federal court building in San Juan.

There was John Rapisardi, a lawyer with O’Melveny & Myers and Governor Ricardo Rosselló’s lead restructuring attorney, while Martin Bienenstock, the board’s lead counsel, was seen at another table.

Like many of Puerto Rico’s bankruptcy executives, Rapisardi was familiar to the island’s fiscal woes beforehand. In August 2016, almost a year before O’Melveny’s first contract with the Government, he participated in an event sponsored by the Puerto Rico Chamber of Commerce on the federal PROMESA law. It took place in a hotel of the Condado neighborhood of San Juan. Outside, on Ashford Avenue, there were protests against the recently signed PROMESA law and the austerity measures that loomed with it. Some of the conference attendees arrived in small boats, through the San José Lagoon, to avoid facing the protesters.

“What would be important for the Board’s effectiveness, in satisfying these high expectations, is to maintain its autonomy and control of the process. There’s going to be a lot of white noise,” said the lawyer during his presentation.

Two years later, Rapisardi signed the government’s lawsuit against the Board, challenging its powers and control. He charges $1,147.50 an hour and has billed more than $2.6 million already.

Rapisardi did not answer a request for comment.

Although PROMESA empowers the Board as the sole representative of Puerto Rico — a sort of legal guardian to the Government — in its bankruptcy, the Rosselló Nevares administration retains its own brigade of lawyers and consultants who actively participate in the process.

In just over a year, the duplicity in work performed by lawyers and consultants to both the Board and the Government has cost taxpayers, at least, $150 million of their money.

For the first year of Puerto Rico’s bankruptcy cases, government advisers and lawyers exceeded those of the Board’s in the amount of fees billed. Governor Rosselló’s side has invoiced almost $90 million during this period, some $25 million more than the Board’s contractors. This happens at times when, for instance, when the government shuts down schools and lacks social workers to attend the high volume of pending cases in the Department of Famlily, impairing its ability to properly deliver these services. 

Double work

To work on the Puerto Rico Electric Power Authority (PREPA), the government mainly uses two consulting firms, Filsinger Energy and Ankura, and two law firms, Greenberg Traurig and O’Melveny. All under multimillion dollar contracts, their scope of work goes from the operation and future plans of Prepa — including its privatization — to the reconstruction of the energy grid following Hurricane María and the revision of contracts such as Whitefish and Cobra Energy.

This consultancy work is in addition to that received on the same issues from the Board’s own lawyers and consultants, such as Citigroup, Proskauer Rose and McKinsey & Co. In total, more than a dozen law firms and financial consulting firms advise on the bankrupt public utility.

Invoices examined show that all these firms frequently hold meetings or conference calls where everyone participates: government consultants, the Board’s own advisers and PREPA staff. Topics include the liquidity of the public corporation, the restructuring of its debt, reconstruction work and potential transactions to sell its assets.

In addition to participating in the court-supervised bankruptcy process under Title III of PROMESA, government contractors often work on the same areas as those retained by the Board such as: preparation and execution of fiscal plans and budgets; critical infrastructure projects and public-private partnerships; and the restructuring of the public debt. In the opinion of a federal district court judge and some experts consulted by the Center for Investigative Journalism (CPI), the duplicity in the work performed by these professionals could very well be one of the main reasons why the tab for these services already exceeds $220 million in just over a year of Puerto Rico’s bankruptcy.

“There is duplicity in the representation of the Government in most cases, filing motions that are sometimes unnecessary. I think that the court will have to take action in the future regarding these invoices,” said Gerardo Carlo Altieri, a former chief judge of the U.S. bankruptcy court in Puerto Rico.

Judge Laura Taylor Swain, who presides over Puerto Rico’s bankruptcy; fee examiner, Brady Williamson; and Rep. Rob Bishop (R-Utah), a key player in the passage of PROMESA, have raised concerns over the duplication of efforts and expenses in the process, Carlo Altieri recalled.

In one year, government contractors invoiced more than $1.7 million only in transportation and hotel expenses, over $220,000 in meals and about $260,000 in photocopies, printing and electronic research. In the case of the Board’s, they have billed less in transportation and hotels (roughly $260,000), almost the same in meals (some $200,000), and three times as much as the government in photocopies, printing and research (over $850,000).

There is also “non-working travel time”; many of these professionals bill half their hourly rates for the time it takes them to travel to work on Puerto Rico’s bankruptcy.

CPI asked newly appointed director of the Financial Advisory & Fiscal Agency Authority (AAFAF), Christian Sobrino, whether he believes it is reasonable for lawyers and consultants to charge in some cases up to $500 an hour for so-called “nonworking travel time.”

“I have to admit that I have never seen an entry like that. If you show it to me, I would evaluate it. But in general, I do not believe that someone should be invoicing for [time spent] traveling,” he said.

For the first eight months of Puerto Rico’s Title III bankruptcy cases, the government’s legal counsel, O’Melveny, invoiced more than $175,000 for the time spent by its lawyers sitting in an airplane or a train on their way to work on these matters. In the latest billing cycle, the law firm did not bill for this concept. The Board’s contractors, meanwhile, have so far invoiced more than $320,000 in non-working travel time.

Another example that also shows the duplicity of efforts and unnecessary expenses are the lawsuits filed by the Government and the Legislature, both against the Board and could have been consolidated, according to Carlo Altieri. Both the Legislature and the governor recently said they will appeal the adverse rulings by Judge Swain, who dismissed most of their claims.

The former bankruptcy judge also noted as a redundant expense the attempts of the Government and the Board to deny access to information and documents on Puerto Rico’s debt.

“There are a number of motions that have been filed to protect banks, investment companies, government advisers under the [the Federal Bankruptcy Code] Rule 2004. Frankly, [this spending] is going to be unnecessary because that information has to be provided. They are asking for immunity and confidentiality to cover the transactions of the [commonwealth’s former fiscal agent] GDB and the government, filing motion after motion to avoid giving out information that in the long term, the courts will force its production,” Carlo Altieri said.

Board blesses contracts

Having recently taken over the government’s fiscal agency, Sobrino said there will be reviews of the amounts and scope of work of its contractors, while seeking “synergies” with the Board to achieve “significant savings.” He consulted, moreover, with the Office of the Comptroller so that instead of paying for hours worked — at rates that exceed $1,000 — it changes to a fixed monthly fee, but that still includes a description of hourly work.

Is this new attempt to achieve savings a response to the high cost and duplicity of efforts seen so far?, CPI asked.

“I will not stipulate that it was done wrong before. That’s not it. It is that we are in a moment where we can evaluate and look for improvements. Again, these are signs of improvement,” said Sobrino during an interview in the offices of what was once the institution tasked with Puerto Rico’s fiscal management, the Government Development Bank.

Moments earlier, however, the official spoke about how “duplicity at the time was necessary” due to the long time it took to establish the Board, when “there wasn’t a culture of mutual work” and both sides still sought to define “the lanes by which to operate.” According to Sobrino, it is now — two years after the Board’s establishment and one year after Puerto Rico’s bankruptcy filing — that “services can be leveraged” to cut down spending on lawyers and consultants.

For its part, the Board remains largely silent over the government’s spending in consultancy and legal services related to the bankruptcy process, in which the federally appointed entity acts as Puerto Rico’s exclusive representative.

“I can’t speak to what the government does with its consultants and whether it uses civil servants or employees. That is the government’s policy. You will have to ask the government about how it structures its use of consultants and non-consultants,” said Natalie Jaresko, the Board’s executive director, when asked about the government’s contractors working in the restructuring process and the entity’s efforts, if any, in controlling this spending.

The Board has reviewed about a dozen of amendments to contracts between the Government and lawyers and found that some exceeded the amount budgeted for these services, or lacked clauses required by Puerto Rico laws, such as those that state that no official of the Rossello Nevares administration has economic interests in the agreements. The entity made these “observations” in each of the arrangements it reviewed in relation to the bankruptcy process.

Despite the “observations”, the Board did approve all of these contracts, except for one, Conway MacKenzie. Before approving its amendment, it requested the firm tasked with projecting how much money the Government has, to include more language on the absence of conflicts of interest.

The Board also showed concerns — yet still approved — the most recent contract between the government and PREPA’s chief restructuring officer, Todd Filsinger, and his Denver-based firm, Filsinger Energy, over its expanded scope of work and high cost of their role. Although the Board urged the Rosselló Nevares administration to review Filsinger’s expanded role at PREPA, it authorized the arrangement in the same letter.

Yet, in early August, Puerto Rico’s fiscal board imposed under PROMESA did reject a contract with Correctional Health Services Corp., a Department of Corrections provider of medical services to inmates. In July, it also halted contracts between MCS and the State Insurance Fund related to the employees benefit plan, for not meeting the fiscal plan’s target of $100 per employee monthly expense for these benefits.

The Board can review any agreement that exceeds $10 million, according to the policy it approved late last year. Most recently, the entity updated this protocol to require additional information — such as certifications that there are no conflicts or economic interest among the parties — at the time the government submits these contracts for review. Jaresko denied that these changes respond to a specific event or occurrence.

From public servants to consultants

Some of the government’s financial consultants worked as public officials under past administrations. Now, from the private sector and charging three to four times what they earned in the public sector, they are charged with engineering the “solutions” that the government will use to pull Puerto Rico out of its fiscal quagmire.

For instance, four former employees of the Luis Fortuño administration who assumed different fiscal roles — Jorge San Miguel, Gerard Gil, Juan Carlos Batlle and Fernando Batlle — are now with Ankura, a financial consulting firm that has billed more than $17 million in just over a year. Ankura opened offices in Puerto Rico in February 2017, two months after Rosselló Nevares entered the governor’s office.

Photo by Juan Costa | Center for Investigative Journalism

Jorge San Miguel during the FCB’s 12th meeting on April 19.

For Sobrino, the fact that they have previously worked in fiscal matters as public servants does not rule them out as government consultants. In the case of Ankura, he said that “it is not fair” to raise flags over a firm where “dozens of professionals work and the number of people who were in the government may be two or three.” About 50 Ankura employees work in the Puerto Rico matter, with Fernando Batlle and San Miguel leading overall billing. Each one of them has billed more than $1 million during the one-year period, CPI found.

Photo by Juan Costa | Center for Investigative Journalism

Fernando Batlle during the FCB’s 12th meeting on April 19.

“Puerto Rico cannot depend on consultants for the rest of its existence. You have to train internal personnel, from the government, to assume responsibilities that may be covered now with consultants, but in the future, a person who has his or her name on the government’s payroll, must assume them,” the AAFAF chief said.

The use of private consultants by the Puerto Rico government in fiscal matters is certainly not new, recalled economist Heriberto Martínez Otero. He pointed out, for example, to the 1970s, under the administration of Rafael Hernández Colón, when economist James Tobin was brought to the island to work on a report that exposes a large part of the economic problems that Puerto Rico still faces. However, Martínez Otero warned that “it has become trendy” for the local government to outsource this type of function.

“We brought very good people to do hard things. The problem is that it became the norm. We stopped trusting in the University of Puerto Rico as a source of consulting. We began to give away all that money. […] Everything has become more technical and expensive for Puerto Rico,” he concluded.

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