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Reducing Puerto Rican Corruption Requires Not Just A New Governor But Fresh U.S. Oversight


Mainland Americans are watching their fellow citizens in Puerto Rico engage in some of the largest protests since the pushback against U.S. military’s use of Vieques Island for bombing practice in 1999—2003.

Now students, union members, grandmothers, families, and superstars Bad Bunny, Ricky Martin, and Bendito are marching against the crass immorality and corruption of their 40-year-old governor, Ricardo Rosello. The protests have included large marches, horse and motorcycle rides, and flotillas of protesters in kayaks outside the governor’s palace.

It’s likely that resistance will continue to grow until the governor either resigns or is impeached. On July 24 it was reported that he is expected to resign. To understand what ignited this conflagration, here are three good background articles.

Meanwhile, where has the Oversight Board created by Congress and appointed by President Obama in 2016 been? Have they been aggressively rooting out corruption and executing their statutory mandate to help “the Puerto Rico government achieve fiscal responsibility and access to the capital markets”?

No. The Oversight Board has failed in their statutory mandate to assist the Puerto Rico government achieve fiscal responsibility. And the Oversight Board explicitly believes their role does not include addressing corruption. Thus the protesters should be marching against the Oversight Board, because they were given significant congressional authority to bring the government’s financial accounts up to date and create transparency in contracting and employee attendance.

The FBI has begun arresting former government officials and contractors and will likely accelerate their arrests, but this is shutting the barn door after the horse has bolted. The Oversight Board has authority to create proactive structural changes in the Puerto Rico government to create transparency and bring government practices closer to mainland state and local government processes.

Failing Their Duties to Puerto Ricans and U.S. Taxpayers

Instead of focusing on necessary changes to government practices, the Oversight Board has spent the majority of their time and money litigating against bondholders and have done almost nothing to stop “no bid” contracts going out the back door to “soul friends” (politically connected individuals). Since the Puerto Rico government filed for bankruptcy on May 3, 2017, government agencies have issued more than 153,000 contracts.

Let me cite a few examples of where the Oversight Board has fallen down. For one, the Puerto Rico government has amassed approximately $7 billion in central government cash since they stopped paying their debts in 2016. This cash now sits in local banks and, contrary to law, the government is not collecting interest on this cash, which means taxpayers are losing about $170 million a year by my estimation ($7.1 billion times the fed funds rate, currently 2.4 percent).

In bankruptcy, the trustee (or Oversight Board) generally secures the debtor’s cash and confirms that cash reported on financial statements has been reconciled with bank statements. Although the Oversight Board hired the firm Duff and Phelps on January 31, 2018 to examine how billions of cash mysteriously appeared in outside bank accounts, there is still no reconciliation of approximately $1.346 billion in bank accounts listed by the government’s fiscal agency and outside financial institutions. Of these outside bank accounts, 764 were not reconciled when Duff and Phelps issued their report in March, 2019.

There is also little outside confirmation of accounts, books, and records maintained by the government. The Oversight Board has also been exceptionally lax on requiring that the government complete their audited financials, although they were given that responsibility by Congress. The latest audited financials issued by the government on May 3, 2019, cover fiscal year 2016. The government just began their fiscal year 2020, so there is a three-year gap in financial reporting.

Are Fraudulent Financials Over for Electric Utility Prepa?

Fernando Scherrer was president of accounting firm BDO Puerto Rico and the U.S. Virgin Islands. He faces five criminal charges linked to BDO contract work with the government of Puerto Rico.

Energy think tank IEEFA wrote, “In the last 2 years, BDO has landed $2.6 million in contracts with PREPA to provide financial consulting and auditing services. For FY 2019, PREPA contracted BDO to prepare monthly financial reports, analyze PREPA’s budgeting and accounts system, draft budget and accounting reports, and perform other tasks critical to the accurate presentation of PREPA’s financial position. These tasks provided the basis for the representations made to the Oversight Board and to the bankruptcy court regarding PREPA’s debt restructuring.”

There is a fundamental problem with presenting financial statements that are two years late and prepared by a firm whose president was just arrested for contracting fraud with the government and for whom the governor cancelled all contracts to a bankruptcy court as the basis of haircutting creditors.

Congress explicitly required reasonably current audited financials to be made available prior to any debt restructuring, but Prepa just published BDO’s audit of their fiscal year 2016 financials last week. Why has the Oversight Board been so lax in enforcing this primary statutory responsibility? Congress gave the board subpoena power, and they could easily have had federal marshals seize all of the government’s books and records in the last two and a half years and supervise the completion of these audits.

And Then There’s Lax Contracting Oversight

After Hurricane Maria devastated the island, the Puerto Rico government gave a $300 million contract to an inexperienced two-person firm named Whitefish to get the electric transmission system up again while shunning the assistance of the electric utility industry association. This caused a political furor in Congress, and the White House and the Oversight Board instituted a contract review program in November, 2017 to review all contracts over $10 million.

The contract review process consists of merely certifying that a contract complies with a certified fiscal plan, which is really just a spreadsheet with broad spending categories. The Oversight Board says they do not do any due diligence on contracts.

This week, the Oversight Board approved a single-bid contract for diesel fuel for the electric utility, but is blaming Prepa officials of negligence on a contract that is double the regular price. The board was involved in the contracting oversight process for almost two months and could have assigned some of their dozens of staff or consultants to assist Prepa officials in negotiating the contract terms, but instead left utility officials to flounder.

Local media outlet El Nuevo Dia reports: “The Oversight Board had no other alternative,” said Natalie Jaresko, in an interview, explaining that the Oversight Board had to hold a virtually emergency meeting this week. This, before the expiration of the contract and after they were told that PREPA has only fuel for three or four days.

Jaresko, the executive director of the Oversight Board, is paid more than $600,000 a year to help the government achieve “fiscal responsibility.” Successfully negotiating a $300 million contract for an essential commodity should be a top priority for all staff and consultants to the government. It’s disheartening that three years into the Oversight’s Board tenure they are still playing a blame game with the government.

Taxpayers Pay If We Fail

Probably the most egregious example of the board failing to help responsibly right the island’s finances is their agreement to pay a $100 million breakup fee to ten hedge funds if their untenable debt restructuring deal with the hedge funds falls apart. A government entity should never be held hostage to hedge funds while doing a financial transaction.

There are many other examples where the Oversight Board has fallen down in their responsibilities. Replacing the current governor, as protesters are demanding, will provide a short-term reduction in corruption. But if the Oversight Board doesn’t take their statutory responsibility of creating change seriously, political corruption will grow again like a weed with the next Puerto Rico administration.

It’s time for the White House to find fresh new board members who will make tackling political corruption their primary goal. This will do more to create economic growth in Puerto Rico than any other reform.