Case: LTS Doc#:198 Filed:03/21/18 Entered:03/21/18 23:37:42 Document Page 1 of 13 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO

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1 Document Page 1 of 13 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO In re: THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of THE EMPLOYEES RETIREMENT SYSTEM OF THE GOVERNMENT OF THE COMMONWEALTH OF PUERTO RICO, Debtor. 1 X X PROMESA Title III Case No. 17-cv (LTS Case No. 17-bk (LTS THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of THE EMPLOYEES RETIREMENT SYSTEM OF THE GOVERNMENT OF THE COMMONWEALTH OF PUERTO RICO, Plaintiff, -against- ALTAIR GLOBAL CREDIT OPPORTUNITIES FUND (A, LLC, ET AL., Defendants-Counterclaimants. X Adv. Proc. No (LTS POST-HEARING SUPPLEMENTAL BRIEF OF EMPLOYEES RETIREMENT SYSTEM OF THE GOVERNMENT OF COMMONWEALTH OF PUERTO RICO IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT 1 The Debtors in these cases and the last four (4 digits of each Debtor s federal tax identification number, as applicable, are (i Commonwealth of Puerto Rico (Bankruptcy Case No. 17 BK 3283-LTS (Last Four Digits of Federal Tax ID: 3481, and (ii Employment Retirement System for the Commonwealth of Puerto Rico (Bankruptcy Case No. 17 BK 3566-LTS (Last Four Digits of Federal Tax ID: 9686.

2 Document Page 2 of 13 To the Honorable United States District Judge Laura Taylor Swain: As requested by the Court in its March 12, 2018 Order [ECF No. 195], Plaintiff Employees Retirement System of the Government of the Commonwealth of Puerto Rico ( ERS or the Debtor, by and through the Financial Oversight and Management Board (the FOMB, as the Debtor s representative pursuant to Section 315(b of the Puerto Rico Oversight, Management, and Economic Stability Act ( PROMESA, 2 respectfully submits this supplemental brief in support of its motion for summary judgment. PRELIMINARY STATEMENT The Court has requested the parties to address whether under Puerto Rico law a hypothetical creditor could have obtained a lien against property of ERS as of the commencement of the case and to provide specific case citations with respect to the role of Bankruptcy Code section 544. The answer is yes a hypothetical or actual lien creditor could have obtained a lien against assets of ERS. ERS s enabling act (the Enabling Act authorizes it to sue and be sued and permits liens against its assets, and no Puerto Rico law, including Act , codified at 3 L.P.R.A et seq. ( Act 66, eliminates a judgment creditor s ability to obtain a judgment lien against ERS. Act 66 does not apply to creditors of ERS; it applies only to creditors seeking to recover against specific non-ers asset classes: funds of a municipality, funds of a public corporation, and the general fund of the Commonwealth. Moreover, Act 66 applies only to the garnishment of funds arising from the Legislature s appropriations (not funds of ERS which are derived from employer and employee contributions, and does not prevent an attachment or judicial lien against ERS s assets. In addition, Puerto Rico s Uniform Commercial Code ( UCC and case law applying the relevant provisions thereof (applying the same text as enacted in other jurisdictions 2 PROMESA is codified at 48 U.S.C

3 Document Page 3 of 13 demonstrate that ERS has rights under the UCC senior to a creditor holding an unperfected security interest. Puerto Rico s UCC defines a lien creditor for purposes of the UCC more broadly than just a judgment creditor (the only type of creditor addressed in Act 66 and expressly includes a bankruptcy trustee, i.e., the FOMB, which has the status and powers of a bankruptcy trustee under PROMESA section 301(c(7. As such, even without the application of Bankruptcy Code section 544, under the UCC, the FOMB as a lien creditor has priority over the Bondholders unperfected security interest, rendering the Bondholders, 3 at best, unsecured claimants and voiding their security interest pursuant to Bankruptcy Code section 506(d. The Court has further asked the parties to provide detailed explanations regarding (a the calculation of employers obligations to ERS under the Enabling Act and its relation to changes in an employer s workforce, and (b the source(s of funds advanced as employee loans and methods for repayment of employee loans. These supplemental facts are summarized herein and set forth in further detail in the Supplemental Declaration of Luis Collazo Rodriguez (the Rodriguez Declaration filed concurrently herewith. I. The Unperfected Security Interest of Bondholders is Subject to Avoidance and Subordination to ERS, Through the FOMB, as Lien Creditor A. Under Puerto Rico Law a Hypothetical Creditor Could Have Obtained a Lien Against Property of ERS as of the Commencement of this Title III Case A judgment creditor could have obtained a lien against ERS s assets as of the commencement of this Title III case. The Enabling Act is clear that as a trust (3 L.P.R.A. 775, ERS can sue and be sued (Id. at 776(f. The ERS Enabling Act further authorizes ERS to grant liens against its assets. Id. at 779(d. Puerto Rico s rules of civil procedure grant courts the ability to order a wide range of judicial remedies to enforce a judgment, including to order 3 Defendants in this action are referred to, collectively, as the Bondholders. 2

4 Document Page 4 of 13 the attachment, garnishment, the prohibition to alienate, claim and delivery of personal property, receivership, an order to do or to desist from doing any specific act. 32 A L.P.R.A. App. III, Rule The term attachment means a lien securing the judgment creditor s claim. In re Moscoso Villaronga, 111 B.R. 13, 16 (Bankr. D. P.R Government assets are subject to attachment except when a court enjoins attachment to avoid interference with governmental functions. 4 See Redondo Constr. Corp. v. P.R. Highway & Transp. Auth., No. 09-civ-2299, ECF No. 45 (D.P.R. Feb. 13, 2012 (ordering attachment against assets of government instrumentality. The Bondholders assert no judgment creditor could have obtained a lien of any sort against ERS s assets because Act 66 forces all judgment creditors into a payment plan (3 L.P.R.A as the sole remedy for a judgment creditor, and a judgment debtor s failure to honor the payment plan only entitles a judgment creditor to the payment of interest on such judgment (3 L.P.R.A ECF No at According to the Bondholders, because Commonwealth law purportedly entirely eliminates judicial liens against the Commonwealth and its agencies, no hypothetical lien creditor can exist that would allow ERS to use the powers of Bankruptcy Code section 544(a. Id. at 34. By asking this Court to rule that their purported security interest is not subject to Bankruptcy Code section 544, the Bondholders are asking this Court to enforce a secret lien (i.e. an unperfected security interest resulting from defective financing statements by making such unperfected security interest senior to a judgment lien creditor. Under the UCC, security 4 Librotex, Inc. v. Autoridad de Acueductos y Alcantarillados de P.R., 138 P.R. Dec. 938, (P.R. 1995, shows Commonwealth entities, such as ERS, do not have blanket immunity from attachment or levy. Rather, the court may bar direct attachment of public funds only when attachment would interfere with the entity s performance of its governmental functions. Librotex, 138 P.R. Dec. at ( the Legislature has vested the Authority with sufficient operational powers so as to consider it as amenable to judicial process as any private enterprise would be under like circumstances, provided there would be no interference with the performance of its governmental functions.. 3

5 Document Page 5 of 13 interests generally may be perfected by the filing of legally sufficient financing statements. When creditors fail to file legally sufficient financing statements, the UCC subordinates unperfected security interests to many different parties it defines as lien creditors to protect innocent parties from advancing unsecured credit without notice that their debtor s assets already are encumbered. See In re Babaeian Transp. Co., 206 B.R. 536, 551 (Bankr. C.D. Cal In any event, to the extent not preempted by PROMESA, Act 66 is inapplicable for each of three independently sufficient reasons. First, Act 66 does not apply to creditors of ERS. The Bondholders argument relies on two sections of Act 66 sections 28 and L.P.R.A. 9141, Both sections are part of subchapter 4 of Act 66. The fatal flaw in the Bondholders argument is subchapter 4 does not apply to all judgments. Rather, Act 66 prevents creditors from seizing three limited categories of funds, which are not held by ERS: (i monies located in the Commonwealth s general fund; (ii funds of a public corporation; and (iii a municipality s budgeted funds. Specifically, section 28 of Act 66 states: [T]he provisions of this subchapter [4] shall apply to all final and binding judgments, except for those related to eminent domains that, on the date of approval of this Act, are pending payment and those issued during the effective term of this Act, whereby the agencies, instrumentalities, public corporations, municipalities, or the Commonwealth of Puerto Rico are compelled to make a disbursement of funds chargeable to the General Fund, the fund of the public corporation in question, or chargeable to the municipal budget, as the case may be 3 L.P.R.A (emphasis added. ERS is not a municipality or a public corporation, it is a trust. See 3 L.P.R.A. 775 (establishing ERS as a trust. As a government entity that is separate and apart from the Commonwealth government (id., creditors can only seize ERS s assets, not monies from the Commonwealth s general fund. Accordingly, Act 66 does not apply to creditors of ERS and, therefore, does not prevent a hypothetical creditor from obtaining a judicial lien against ERS s assets. 4

6 Document Page 6 of 13 Second, Act 66 only restricts garnishing of funds, not attachment. Section 29 of Act 66 provides, in relevant part: No agency or instrumentality of the Commonwealth, or public corporation or municipality, official or employee shall be compelled to make any payment whatsoever with respect to a previously authorized judgment or payment plan, when there are no funds available therefor when the legislative appropriation for such purposes has been exhausted; therefore, the garnishment of funds to enforce a judgment issued against the Commonwealth is hereby prohibited. 3 L.P.R.A (emphasis added. Section 29 only addresses a court s ability to garnish funds. But garnishment is only one form of relief a court can order under Puerto Rico s rules of civil procedure. See 32 A L.P.R.A. App. III, Rule A court can also order attachment. Section 29 of Act 66 does not restrict a court from ordering attachment as a remedy; indeed, neither section 28 nor 29 of Act 66 mentions attachment. Since attachment is a judicial lien under Puerto Rico law (see Moscoso Villaronga, 111 B.R. at 16, Act 66 does not restrict a creditor s ability to obtain a judicial lien against ERS. Third, the first sentence of section 29 confirms that Act 66 only protects agencies of the Commonwealth that are recipients of legislative appropriations. See 3 L.P.R.A ( No agency shall be compelled to make any payment when the legislative appropriation for such purposes has been exhausted. Here, ERS did not receive legislative appropriations as, prior to the commencement date of its Title III case, ERS was funded through employer and employee contributions. Accordingly, ERS is not protected from judgment liens under Act 66. B. The Unperfected Security Interest Is Subordinate to ERS, Through the FOMB, as a Lien Creditor Under the Puerto Rico UCC Even if Act 66 were to prevent a hypothetical creditor from obtaining a judgment lien against ERS s assets for purposes of Bankruptcy Code section 544, under the UCC a lien creditor with priority over unperfected security interests still existed as of the commencement of this title 5

7 Document Page 7 of 13 III case. Puerto Rico s UCC provides an unperfected security interest is subordinate to the rights of a lien creditor. 19. L.P.R.A. 2267(a. The Bondholders argument hinges on the assumption that the only kind of lien creditor that can exist is a judgment lien creditor. Not so. Under Puerto Rico s UCC, there are four separate categories of lien creditors: (A a creditor that has acquired a lien on the property involved by attachment, levy, or the like; (B an assignee for benefit of creditors from the time of assignment; (C a trustee in bankruptcy from the date of the filing of the petition, or (D a receiver in equity from the time of appointment. 19 L.P.R.A. 2212(52 (emphasis added. Accordingly, even if Act 66 applies as the Bondholders claim, it would only preclude the possible existence of a lien creditor under UCC 9-102(52(A. It would not preclude the existence of any of the other forms of lien creditor as defined in the UCC for purposes of the UCC s provisions, which do not require the existence of a lien or even the status of being a creditor, in particular a trustee in bankruptcy. There can be no dispute PROMESA makes the FOMB the bankruptcy trustee of ERS in its Title III case. 48 U.S.C. 2161(c(7. Thus, as of the ERS petition date, there was an actual lien creditor, the FOMB on behalf of ERS, which, under the UCC s rules, took ERS s assets free and clear of unperfected security interests, regardless of whether a judgment creditor could have attached ERS s assets. 5 5 The UCC contains many additional provisions where a person may obtain rights senior to or free of an existing security interest, each of which does not require that the person having the senior rights have the ability to obtain a lien as contemplated by Bankruptcy Code 544. See, e.g., 9-317(a (assignees for benefit of creditor and receivers have priority over an unperfected security interest; 9-317(b (certain buyers of tangible collateral may take free of unperfected security interest; 9-317(c (certain lessees of goods may take free of security interest in leased goods; 9-317(d (certain buyers and licensees of intangible collateral may take free of unperfected security interest; (creditor of consignee may have rights senior to those of ownership rights of consignor; (buyer of goods in ordinary course of business takes free of a security interest created by its seller, even if the security interest is perfected; 9-321(b (nonexclusive licensee of general intangible in ordinary course of business takes free of security interest in general intangible, even if perfected; 9-321(c (lessee of goods in ordinary course of business takes free of security interest in the goods, even if perfected. 6

8 Document Page 8 of 13 Accordingly, pursuant to Puerto Rico s UCC, the Bondholders liens are subordinate to the rights of the FOMB as the trustee for ERS and effectively nullified independent of Bankruptcy Code section 544 and without the need for any avoidance action. 6 Section of the UCC provides that an unperfected security interest is subordinate to a person that becomes a lien creditor. 19 L.P.R.A. 2267(a. As the FOMB is a lien creditor by virtue of having the rights of an ERS bankruptcy trustee, under Puerto Rico s UCC, the Bondholders unperfected security interest is subordinate to the rights of the trustee regardless of whether Bankruptcy Code section 544(a is invoked. As explained by one bankruptcy court: The trustee in bankruptcy may avoid an unperfected security interest pursuant to 11 U.S.C. 544(a by, in effect, standing in the shoes of the hypothetical judicial lien creditor. However, Section of the UCC goes farther than the familiar principle just stated. The definition of lien creditor as used in Section 9-301(1(b includes specifically a trustee in bankruptcy. Thus, as to the trustee in bankruptcy, the UCC makes the lien rights of the holder of an unperfected security interest subordinate to the rights of a trustee in bankruptcy, without any requirement to avoid the lien under the Bankruptcy Code. GAF Linden Emples. Fed. Credit Union v. Robertson (In re Robertson, 232 B.R. 846, 850 (Bankr. D. Md. 1996; see also Richardson v. Countrywide Home Loans (In re Gregory, Bankruptcy Code section 544 still defeats the Bondholders unperfected security interest as numerous cases hold a bankruptcy trustee s status as a lien creditor under the UCC satisfies Bankruptcy Code section 544. See, e.g., Babaeian Transportation, 206 B.R. at 540 ( Under [Bankruptcy Code 544 and UCC 9-102], the trustee stands in the shoes of a hypothetical lien creditor whose lien arose on the day that the bankruptcy petition was filed. ; Coral Petroleum, Inc. v. Banque Paribas (In re Coral Petroleum, Inc., 50 B.R. 830, 842 (Bankr. S.D.Tex (a lien creditor.... includes.... a trustee in bankruptcy from the date of the filing of the petition.... The Court finds that [creditors] had unperfected security interests in the [note] which can be avoided by the debtor-in-possession. ; In re Henzler Mfg. Corp., 36 B.R. 303, 304 (Bankr. N.D. Ohio ( Since under [Ohio s UCC] a lien creditor includes a trustee in bankruptcy from the date of the filing of the petition, it is apparent that, [creditor s] lien having been unperfected under Ohio law on the date of the filing of the petition in bankruptcy, it is subordinated to the rights of the trustee in this case and therefore the trustee could pursue an action under section 544; Togut v. Wapnick (In re Karachi Cab Corp., 21 B.R. 822, 825 (Bankr. S.D.N.Y (citing the definition of lien creditor as including bankruptcy trustees and holding UCC 9-301(1(b makes the unperfected security interest subordinate to one who becomes a lien creditor before the security interest is perfected The trustee in bankruptcy as a hypothetical lien creditor under 544(a of the Bankruptcy Code has priority over the unsecured defendant with respect to the collateral.. 7 Former UCC is current UCC

9 Document Page 9 of 13 B.R. 82, 92 n.18 (Bankr. W.D. Mich ( Technically, a bankruptcy trustee does not even have to rely upon 11 U.S.C. 544(a(1 to prevail over a creditor claiming an unperfected security interest because the UCC defines a lien creditor as a trustee in bankruptcy from the date of the filing of the petition. ; see also In re Dennis Mitchell Industries, Inc., 419 F.2d 349, 358 (3d Cir (holding unperfected security interest is subordinate to the rights of the trustee under both 70(c of the Bankruptcy Act and 9-301(1(b and (3 of the Uniform Commercial Code.. And, the result of the subordination of an unperfected security interest to the rights of a bankruptcy trustee under the UCC is to render the subject creditor unsecured. GAF Linden, 232 B.R. at 851 (without the need for an avoidance action, the holder of the unperfected security interest is an unsecured creditor, and the holder s security interest is void, under Bankruptcy Code section 506(d. Accordingly, the interplay of UCC sections 9-102(52 and 9-317(a renders the Bondholders unsecured creditors without the need for ERS to utilize Bankruptcy Code section 544(a. In re Robertson, 232 B.R. at 853 (holding claimholders with unperfected security interests are rendered unsecured claimholders for distribution purposes under state UCC law; In re Jim Ross Tires, Inc., 379 B.R. 670, 675 (Bankr. S.D. Tex (unperfected creditor has an unsecured claim because under Texas [UCC] law, the moment Debtor filed for bankruptcy, the Trustee became a lien creditor whose rights trump those holding unperfected security interests.. II. Method for Calculating Employers Contributions Currently, there is no method for calculating employer contributions because ERS stopped receiving all such contributions as of July 1, 2017 due to the Commonwealth s adoption of a pay-as-you-go pension system ( Pay-Go. See Act and Joint Resolution 188; Rodriguez Decl. at 3. From the time of the 2008 ERS bond issuance until July 1, 2017, the 8

10 Document Page 10 of 13 general method for calculating employer contributions was to multiply the contribution rate set by the Legislature by the amount of an employer s gross monthly payroll. Rodriguez Decl. at 4. The method, including the applicable contribution rate, was set forth in the Enabling Act and its amendments. Id.; see also 3 L.P.R.A. 787f; 3 L.P.R.A (2008; Act (d; Act Employers, not ERS, would calculate what they would remit to ERS each month. Id. at 5. Because employers would do so by multiplying the applicable contribution rate against the prior month s gross payroll, employer contributions were correlated with the amount of wages paid at that time to an employer s workforce. Id. Changes in the number of employees or how much employees earned could change the amount of employer contributions remitted to ERS from one month to the next. Id. Employer contributions were remitted consistent with the process described in ERS s memorandum in support of summary judgment [ECF No. 91]. Accordingly, for the reasons set forth therein, Bankruptcy Code section 552 prevents any security interest in employer contributions from attaching to postpetition employer contributions received by ERS. III. Employee Loan Source and Payment Methods Historically, the ERS Enabling Act authorized ERS to make loans to employees and retirees for specified purposes. 3 L.P.R.A. 779(b(1(F. ERS stopped making all loans as of November 15, Rodriguez Decl. at 6. From the time of the 2008 bond issuance through November 15, 2016, ERS used cash in its general operational account to fund employee loans. Id. Funds deposited in the general operational account were not separately accounted for by 8 Pursuant to Pay-Go, after July 1, 2017, all covered public employers must remit Pay-Go fees to the Department of Treasury to cover the pensions and benefits for each employer s current pensioners and beneficiaries. See Act , Art. 2.1(b. 9

11 Document Page 11 of 13 source and included employees contributions, as well as disability insurance payments, loan repayments, and proceeds from investments. Id. Employer contributions from public corporations and municipalities were also deposited in the general operational account and ERS used the account to make debt service payments to the Bank of New York Mellon pursuant to the ERS Bond Resolution. Id. ERS does not know whether any employer contributions deposited in the general operational account were ever used to fund employee loans, because ERS did not track the funds used for loans to specific types of funds that were deposited and combined with other funds in the account. Id. Prior to July 1, 2017, borrowers would remit loan payments to ERS: (i through deductions from borrowers wages that were remitted to ERS by employers; (ii in the case of retirees, deductions from their pensions; or (iii directly to ERS by check, money order, direct debit, or debit card. Id. at 7. Loan payments deducted from employees wages were identified as such when remitted to ERS and were made in addition to pension contributions owed from both employees and employers. Id. As of July 1, 2017, in connection with the implementation of Pay-Go, all loan payments now go to the Commonwealth s Treasury Department. Id. at 8. CONCLUSION For the foregoing reasons, as well as those set forth in ERS s motion for summary judgment, ERS s motion for summary judgment should be granted. 10

12 Document Page 12 of 13 Dated: March 21, 2018 New York, NY Respectfully submitted, /s/ Martin J. Bienenstock Steven O. Weise (pro hac vice Martin J. Bienenstock (pro hac vice Timothy W. Mungovan (pro hac vice Kevin J. Perra (pro hac vice Paul V. Possinger (pro hac vice PROSKAUER ROSE LLP Eleven Times Square New York, NY Tel: ( Fax: ( Attorneys for the Financial Oversight and Management Board for Puerto Rico, as representative of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico /s/ Luis F. del Valle-Emmanuelli Luis F. del Valle-Emmanuelli USDC-PR No P.O. Box Carolina, Puerto Rico Tel Fax OF COUNSEL FOR A&S LEGAL STUDIO, PSC 434 Avenida Hostos San Juan, PR Tel: ( / Fax: ( Attorneys for the Financial Oversight and Management Board for Puerto Rico, as representative of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico 11

13 Document Page 13 of 13 CERTIFICATE OF SERVICE I hereby certify that, on this same date, I electronically filed the foregoing with the Clerk of the Court using the CM/ECF system, which will send notifications of such filing to all CM/ECF participants in this case. /s/ Luis F. del Valle-Emmanuelli Luis F. del Valle-Emmanuelli 12

14 Case: LTS Doc#:198-1 Filed:03/21/18 Entered:03/21/18 23:37:42 Affidavit Page 1 of 5 Desc: UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO X IN RE: THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of PROMESA Title III No. 17 CV 1685-LTS No. 17 BK 3566-LTS EMPLOYEES RETIREMENT SYSTEM OF THE GOVERNMENT OF THE COMMONWEALTH OF PUERTO RICO, Debtor X THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, No. 17 AP 213-LTS as representative of EMPLOYEES RETIREMENT SYSTEM OF THE GOVERNMENT OF THE COMMONWEALTH OF PUERTO RICO, Plaintiff, -against- ALTAIR GLOBAL CREDIT OPPORTUNITIES FUND (A, LLC, ET AL., Defendants-Counterclaimants X DECLARATION OF LUIS COLLAZO RODRIGUEZ IN SUPPORT OF ERS S SUPPLEMENTAL BRIEF IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT 1 The Debtors in these cases along with each Debtor s respective Title III case number listed as a bankruptcy case number due to software limitations and the last four (4 digits of each Debtor s federal tax identification number, as applicable, are the (i Commonwealth of Puerto Rico (Last Four Digits of Federal Tax ID: 3481, and (ii Employment Retirement System for the Commonwealth of Puerto Rico (Last Four Digits of Federal Tax ID: 9686.

15 Case: LTS Doc#:198-1 Filed:03/21/18 Entered:03/21/18 23:37:42 Affidavit Page 2 of 5 Desc: I, Luis Collazo Rodriguez, declare as follows: 1. I am the Administrator of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico ( ERS. I submit this declaration in support of ERS s Supplemental Brief In Support of Motion for Summary Judgment. I have personal knowledge of the matters stated herein, including through my review of ERS business records and information gathered at my direction, and, if called and sworn as a witness, could testify competently thereto. 2. As ERS s Administrator since May 2017, I am responsible for overseeing ERS s operations and personnel. I reviewed the Court s March 12, 2018 Order Directing Supplemental Submissions (the March 12, 2018 Order in the above-captioned case, ECF 198, and then conferred internally with others at ERS to provide the information provided herein, which reflects information that is currently available to ERS. Employer Contributions 3. The March 12, 2018 Order requested the method associated with calculating an employer s obligations to ERS for the relevant contributions. Currently there are no such contributions, because ERS stopped receiving contributions of any kind from employers as of July 1, 2017 due to the Commonwealth s adoption of a pay-as-you-go pension system ( Pay- Go. See Act and Joint Resolution 188. It is my understanding that Pay-Go was enacted to ensure funding for pension payments in light of ERS s insolvency and the pension crisis facing Puerto Rico. Pursuant to Pay-Go, public employers no longer make any contributions to ERS to build the assets of the ERS trust. Instead, the Commonwealth now pays the pension and benefit obligations of its current retirees and beneficiaries, as well as those of public corporations and municipalities who then reimburse the Commonwealth.

16 Case: LTS Doc#:198-1 Filed:03/21/18 Entered:03/21/18 23:37:42 Affidavit Page 3 of 5 Desc: 4. Prior to July 1, 2017, the way to calculate an employer s monthly obligation for employer contributions was provided by the ERS Enabling Act: [contribution rate set by law] x [employee s gross salary] = employer contribution. See, e.g., 3 L.P.R.A (2008 ( Every employer shall compulsorily contribute to the System a sum equal to nine point two hundred and seventy-five percent (9.275% of the salary of each participant of the Program as long as the participant is an employee.. For example, in 2008, a public employer would have calculated what it owed in a given month by multiplying by the gross salary that month for its employees. The Legislature increased the contribution rate to % on July 1, 2011, and mandated annual rate increases of 1% per year through June 30, 2016 and then 1.25% per year thereafter until June 30, See Act (d; see also Act The Legislature also included temporary employees of the Commonwealth and public corporations as system participants in 2011 such that their wages would also be subject to employer contributions. See Act (a. It is my understanding that the calculation method generally remained the same until July 1, 2017, when ERS stopped receiving all contributions from employers. 5. The Court also requested information regarding the correlation between an employer s obligations to ERS and any changes in the employer s workforce (e.g., changes in the size of the work force or in the total hours performed by the employer s workforce, etc.. Prior to July 1, 2017, employers (and not ERS itself would calculate what they would remit to ERS each month by multiplying the mandatory contribution rate against the prior month s gross payroll. Changes in the number of employees in a given month and how much employees earned could change how much an employer paid ERS from one month to the next. Accordingly, contributions were correlated with the amount of wages paid to an employer s 2

17 Case: LTS Doc#:198-1 Filed:03/21/18 Entered:03/21/18 23:37:42 Affidavit Page 4 of 5 Desc: employees in a given month. 2 Prior to July 1, 2017, employers generally would provide payroll data to ERS when remitting payments to ERS, but ERS did not invoice employers for employer contributions or calculate the amount owed by an employer unless an employer had failed to make payments to ERS. Employee/Pensioner Loans 6. The March 12, 2018 Order requested the source(s of the funds used to make loans to employees. Again, this is a historical issue because ERS stopped making mortgage loans to employees and pensioners who were system participants as of December 16, 2015, and stopped making all other loans as of November 15, Based on the information reasonably available to ERS, from the time of the 2008 bond issuance until November 15, 2016, ERS used cash in its general operational account to fund loans to employees and pensioners. Funds deposited in the general operational account were not separately accounted for by source and included employees contributions, as well as disability insurance payments, loan payments, and proceeds from investments, including the sale of investments. Employer contributions from public corporations and municipalities were also deposited in the general operational account and ERS used the account to make debt service payments to the Bank of New York Mellon pursuant to the ERS Bond Resolution. ERS does not know whether any employer contributions deposited in the general operational account were ever used to fund employee loans, because ERS did not track the funds used for loans to specific types of funds that were deposited and combined with other funds in the general operational account. 2 In contrast, after July 1, 2017, all covered public employers must remit Pay-Go fees to the Department of Treasury to cover the pensions and benefits for each employer s current pensioners and beneficiaries. See Act , Art. 2.1(b. The Commonwealth and AAFAF, not ERS, are responsible for determining Pay-Go fees. 3

18 Case: LTS Doc#:198-1 Filed:03/21/18 Entered:03/21/18 23:37:42 Desc: Affidavit Page 5 of 5