Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 1 of 47

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1 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 1 of 47 Desc: Main IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO In re: COMMONWEALTH OF PUERTO RICO, Debtor. Title III Case No. 3:17-cv ASSURED GUARANTY CORP.; ASSURED GUARANTY MUNICIPAL CORP.; AND NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION, v. Plaintiffs, Adv. No. COMMONWEALTH OF PUERTO RICO; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO; PUERTO RICO FISCAL AGENCY AND FINANCIAL ADVISORY AUTHORITY; HON. RICARDO ANTONIO ROSSELLÓ NEVARES; GERARDO PORTELA FRANCO; HON. RAÚL MALDONADO GAUTIER; and JOHN DOES 1-3, Defendants. ADVERSARY COMPLAINT Plaintiffs Assured Guaranty Corp. ( AGC ) and Assured Guaranty Municipal Corp., f/k/a Financial Security Assurance Inc. ( AGM and, together with AGC, Assured ), by their attorneys Casellas Alcover & Burgos P.S.C. and Cadwalader, Wickersham & Taft LLP, and Plaintiff National Public Finance Guarantee Corporation ( National and together with Assured, the Plaintiffs ), by and through its attorneys Adsuar Muñiz Goyco Seda & Pérez-Ochoa, P.S.C., and Weil, Gotshal & Manges LLP, for their Adversary Complaint against defendants the USActive

2 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 2 of 47 Desc: Main Commonwealth of Puerto Rico; the Financial Oversight and Management Board for Puerto Rico; the Puerto Rico Fiscal Agency and Financial Advisory Authority; Hon. Ricardo Rosselló Nevares; Gerardo Portela Franco; Hon. Raúl Maldonado Gautier; and John Does 1-3 (collectively, the Defendants ), allege as follows: NATURE OF THIS ADVERSARY PROCEEDING 1. Assured has insured approximately $5.4 billion of the indebtedness of the Commonwealth of Puerto Rico (the Commonwealth ) and its public corporations, including approximately $1.75 billion of general obligation bonds ( GO Bonds ) and other obligations that constitute public debt under the constitution of the Commonwealth (the Commonwealth Constitution ). 2. National has insured approximately $3.6 billion of the indebtedness of the Commonwealth and its public corporations, including approximately $881 million of GO Bonds and other obligations that constitute public debt under the Commonwealth Constitution. 3. Obligations comprising public debt are given a priority over all other debts and expenses of the Commonwealth, bar none, by the Commonwealth Constitution. In order to ensure compliance with this priority, the Commonwealth s Management and Budget Office Organic Act (Act No , the OMB Act ) expressly prioritizes payment of the public debt and of other commitments entered into by virtue of legal contracts in force over regular expenses of government. Similarly, in order to further ensure compliance with this priority, various other debt issuances that are secured by specific special revenue streams are expressly made subject to a statutory right of the Commonwealth to claw back revenues to the extent necessary (but only to the extent necessary) to pay the public debt. The Puerto Rico -2-

3 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 3 of 47 Desc: Main Oversight, Management, and Economic Stability Act ( PROMESA ) 1 expressly states that these constitutional and statutory priorities must be respected. See 48 U.S.C. 2141(b)(1)(N). 4. PROMESA in Section 201(b)(1)(N) specifically requires that any fiscal plan must respect lawful liens and priorities. The Commonwealth s fiscal plan dated March 13, 2017 (as amended, the Illegal Fiscal Plan ) ( Exhibit A ), as implemented through the newlyenacted Fiscal Plan Compliance Law (P. de la C. 938, the Fiscal Plan Act ), totally disregards these constitutional priorities and liens and therefore constitutes a gross violation of the clear statutory mandates of PROMESA. The Illegal Fiscal Plan, as implemented through the Fiscal Plan Act, turns on its head generations of federal constitutional law governing the priority and protection of secured debt by giving all general expenses and all unsecured debts payment priority over the payment of any bond debts granted constitutional first priority or secured by liens. 5. The Illegal Fiscal Plan, as implemented through the Fiscal Plan Act, also violates Section 201(b)(1)(M) of PROMESA, which requires that a fiscal plan must ensure that assets, funds, or resources of a territorial instrumentality are not... transferred to... [the Commonwealth] except in accordance with law. 48 U.S.C. 2141(b)(1)(N). The Illegal Fiscal Plan actually requires, and the Fiscal Plan Act authorizes, such illegal transfers by allowing the Commonwealth to simply misappropriate for its own general use special revenues that constitute property of its public corporations and their bondholders. 6. Similarly, Sections 101(a) and 201(b) of PROMESA require a compliant fiscal plan to provide a method to achieve fiscal responsibility and access to the capital markets, (48 U.S.C. 2121(a), 2141(b)), yet the Illegal Fiscal Plan fails to significantly cut 1 Pub. L. No , 130 Stat. 549 (2016) (codified at 48 U.S.C )). -3-

4 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 4 of 47 Desc: Main government expenses and, by impairing the contractual rights of the Commonwealth s creditors and stealing their property, ensures that Puerto Rico will not regain access to the capital markets for the foreseeable future. 7. In addition to violating PROMESA for the reasons stated above, the Illegal Fiscal Plan and the Fiscal Plan Act also violate the Constitution of the United States (the U.S. Constitution ) by substantially impairing the contractual rights of Plaintiffs and other creditors and by depriving them of property without just compensation or due process of law. 8. Unless totally recast, the Illegal Fiscal Plan and the Fiscal Plan Act cannot possibly be permitted to serve as the basis for any lawful plan of adjustment that complies with the U.S. Constitution and the Commonwealth Constitution and the laws of the United States and of Puerto Rico. Accordingly, Defendants should be enjoined and stayed from presenting any plan of adjustment until the Illegal Fiscal Plan is recast to comply with law. THE PARTIES 9. Plaintiff Assured Guaranty Corp. ( AGC ) is a Maryland insurance company with its principal place of business at 1633 Broadway, New York, New York Plaintiff Assured Guaranty Municipal Corp. ( AGM ) is a New York insurance company with its principal place of business at 1633 Broadway, New York, New York Plaintiff National Public Finance Corporation ( National ) is a New York insurance company with its principal place of business at 1 Manhattanville Road, Purchase, NY Defendant the Commonwealth of Puerto Rico (the Commonwealth ) is a territory of the United States. -4-

5 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 5 of 47 Desc: Main 13. Defendant the Financial Oversight and Management Board for Puerto Rico (the Oversight Board ) was created under Section 101(b)(1) of PROMESA (48 U.S.C. 2121(b)(1)) as an entity within the [Commonwealth] government. 48 U.S.C. 2121(c)(1). 14. Defendant the Puerto Rico Fiscal Agency and Financial Advisory Authority ( AAFAF ) is a public corporation organized under the laws of the Commonwealth. 15. Defendant Hon. Ricardo Rosselló Nevares ( Governor Rosselló ) is the Governor of the Commonwealth. Plaintiffs sue Governor Rosselló in his official capacity. 16. Defendant Gerardo Portela Franco (the AAFAF Executive Director ) is the Executive Director of AAFAF and in that capacity is empowered to implement the Illegal Fiscal Plan and the Fiscal Plan Act. Plaintiffs sue the AAFAF Executive Director in his official capacity. 17. Defendant Hon. Raúl Maldonado Gautier (the Secretary of Treasury ) is the Secretary of Treasury of the Commonwealth and in that capacity is empowered to implement the Illegal Fiscal Plan and the Fiscal Plan Act. Plaintiffs sue the Secretary of Treasury in his official capacity. 18. Defendant John Doe 1 is any successor to Governor Rosselló as Governor of the Commonwealth. Plaintiffs sue John Doe 1 in his or her official capacity. 19. Defendant John Doe 2 is any successor to Gerardo Portela Franco as Executive Director of AAFAF and in that capacity is empowered to implement the Illegal Fiscal Plan and the Fiscal Plan Act. Plaintiffs sue John Doe 2 in his or her official capacity. 20. Defendant John Doe 3 is any successor to Hon. Raúl Maldonado Gautier as Secretary of Treasury of the Commonwealth and in that capacity is empowered to implement the Illegal Fiscal Plan and the Fiscal Plan Act. Plaintiffs sue John Doe 3 in his or her official capacity. -5-

6 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 6 of 47 Desc: Main JURISDICTION AND VENUE 21. This Court has federal question subject matter jurisdiction pursuant to 28 U.S.C because this action arises under PROMESA and the U.S. Constitution. This Court also has subject matter jurisdiction under 28 U.S.C. 1332, as the parties are of diverse citizenship and the amount in controversy exceeds $75,000. In addition, this Court has jurisdiction under Section 106(a) of PROMESA, which grants jurisdiction to this Court over any action against the Oversight Board, and any action otherwise arising out of [PROMESA], in whole or in part. 48 U.S.C. 2126(a). 22. Plaintiffs seek a declaration and related relief pursuant to 28 U.S.C and An actual and justiciable controversy has arisen and exists between the parties with respect to the issues and claims alleged herein. 23. This is an adversary proceeding pursuant to Rule 7001 of the Federal Rules of Bankruptcy Procedure and Section 310 of PROMESA, which provides The Federal Rules of Bankruptcy Procedure shall apply to a case under [Title III of PROMESA] and to all civil proceedings arising in or related to cases under [Title III of PROMESA]. 48 U.S.C. 2170; Fed. R. Bankr. P Venue is proper in this District under Section 307 of PROMESA. 48 U.S.C LEGAL AND FACTUAL BACKGROUND I. Plaintiffs Insure Bonds Issued By Puerto Rico And Its Instrumentalities 25. Plaintiffs are leading providers of financial guaranty insurance, which is a type of insurance whereby an insurer guarantees scheduled payments of interest and principal as and when due on a bond or other obligation. Plaintiffs insure scheduled principal and interest -6-

7 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 7 of 47 Desc: Main payments when due on municipal, public infrastructure, and structured financings both in the United States and around the world. 26. Governments, including the Commonwealth and its public corporations, have historically taken advantage of financial guaranty insurance because it significantly enhances their ability to raise funds at a lower interest rate. The economic value of financial guaranty insurance to the issuers is a savings in interest costs, reflecting the difference in yield payable on the higher rated insured obligation from that on the same lower rated obligation if uninsured. Such insurance is especially important to issuers such as the Commonwealth and its public corporations who have and will have significant borrowing needs, notwithstanding their lower credit rating. 27. Plaintiffs have standing to bring this adversary proceeding as parties in interest in these proceedings, and because under their insurance agreements and/or insurance policies, Plaintiffs are deemed to be the sole owners of the bonds that they insure for purposes of, or otherwise have control rights over, consents and other bondholder actions, including exercising rights and remedies. Plaintiffs are also generally express third party beneficiaries of the resolutions, indentures, or trust agreements under which the bonds are issued. As such, as Section 301(c)(3)(B) of PROMESA expressly recognized, financial guaranty insurers such as Plaintiffs are authorized to act on behalf of the holders of the bonds they insure, including in litigation generally, in these proceedings, and in this adversary proceeding, and Plaintiffs right to act on behalf of bondholders is not dependent upon a default or subrogation. 48 U.S.C. 2161(c)(3)(B). In addition, however, Plaintiffs have been subrogated to the rights of relevant bondholders upon paying the claims of such bondholders following a default, as set forth below. Payment by Plaintiffs neither satisfies nor discharges an issuer s obligation to pay and, to the -7-

8 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 8 of 47 Desc: Main extent Plaintiffs make payments to bondholders, Plaintiffs step into the shoes of such bondholders and effectively becomes the owner of their bonds. 28. Plaintiffs insure the following types of Puerto Rico public debt at issue in this adversary proceeding: A. Public Debt 1. GO Bonds 29. Assured insures approximately $1.5 billion of general obligation bonds ( GO Bonds ) issued by the Commonwealth. Following the Commonwealth s default with respect to principal and interest payments due on the GO Bonds on July 1, 2016 and January 1, 2017, Assured paid approximately $232 million in aggregate claims by GO Bondholders and is now fully subrogated to the rights of the GO Bondholders for the claims it paid. 30. National insures approximately $691 million of GO Bonds issued by the Commonwealth. Following the Commonwealth s default with respect to principal and interest payments due on the GO Bonds on July 1, 2016 and January 1, 2017, National paid approximately $187 million in aggregate claims by GO Bondholders and is now fully subrogated to the rights of the GO Bondholders for the claims it paid. 2. PBA Bonds 31. The Public Buildings Authority ( PBA ) is an instrumentality of the Commonwealth created by Act No (the PBA Enabling Act ) for the primary purpose of designing and constructing office buildings, quarters, courts, warehouses, shops, schools, health facilities, social welfare facilities, and related facilities for lease to the Commonwealth and its departments, agencies, instrumentalities, and municipalities. Pursuant to the PBA Enabling Act, PBA has issued certain revenue bonds (the PBA Bonds ) under general bond resolutions (the PBA Resolutions ) adopted in 1970 and

9 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 9 of 47 Desc: Main 32. Pursuant to the PBA Enabling Act and the PBA Resolutions, PBA Bonds are secured by a pledge of the rentals (the PBA Pledged Revenues ) of government facilities financed or refinanced by PBA Bonds and leased by PBA to departments, agencies, instrumentalities, and municipalities of the Commonwealth. The PBA Bonds are guaranteed by the Commonwealth, and as such constitute public debt entitled to the same priority of payment as the GO Bonds under the Commonwealth Constitution. In the PBA Enabling Act, the Commonwealth covenanted that it would not limit or alter the rights or powers... granted [PBA] until the [PBA Bonds]... together with interest thereon, have been fully liquidated and retired. 22 L.P.R.A Assured insures approximately $174 million of the outstanding PBA Bonds. National insures approximately $190 million of the outstanding PBA Bonds Following PBA s default with respect to debt service payments due on PBA Bonds on July 1, 2016 and January 1, 2017, Assured paid approximately $4.4 million, and National paid approximately $5 million, in aggregate claims by PBA Bondholders and Plaintiffs are now fully subrogated to the rights of PBA Bondholders for the claims they paid. B. Authority Bonds 34. In addition to public debt, Assured insures bonds (the Authority Bonds ) issued by the Puerto Rico Highways and Transportation Authority ( PRHTA ), the Puerto Rico Convention Center District Authority ( PRCCDA ), and the Puerto Rico Infrastructure Financing Authority ( PRIFA, and together with PRHTA and PRCCDA, the Authorities ). National also insures bonds issued by PRHTA. The Authority Bonds are secured by statutory and contractual liens on specific pledged special revenue streams (collectively, the Pledged Special Revenues ). Each of the Authorities is a public corporation separate and distinct from the Commonwealth, and under the Authorities respective enabling acts, the Commonwealth -9-

10 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 10 of 47 Desc: Main (prior to its diversion of their revenues) is not responsible for the Authorities bond debts, just as the Authorities are not responsible for the general fund obligations of the Commonwealth. 1. PRHTA Bonds 35. PRHTA is a public corporation created by Act No (the PRHTA Enabling Act ) to assume responsibility for the construction of highways and other transportation systems in Puerto Rico. Pursuant to the PRHTA Enabling Act, PRHTA has issued certain bonds (the PRHTA Bonds ) under general bond resolutions (the PRHTA Resolutions ) adopted in 1968 and Pursuant to the PRHTA Enabling Act and PRHTA Resolutions, the PRHTA Bonds are secured by a gross lien on (i) revenues derived from PRHTA s toll facilities (the Pledged Toll Revenues ); (ii) gasoline, diesel, crude oil, and other special excise taxes levied by the Commonwealth (the PRHTA Pledged Tax Revenues ); and (iii) motor vehicle license fees collected by the Commonwealth (the Vehicle Fees ; together with the PRHTA Pledged Tax Revenues, the PRHTA Pledged Special Excise Taxes ; and together with the Pledged Toll Revenues and the PRHTA Pledged Tax Revenues, the PRHTA Pledged Special Revenues ). 37. The Secretary of Treasury is required by statute to transfer the PRHTA Pledged Special Excise Taxes to PRHTA each month for the benefit of PRHTA Bondholders, and the PRHTA Pledged Special Excise Taxes constitute trust funds that are property of the PRHTA Bondholders and not of the Commonwealth. See, e.g., 13 L.P.R.A (a)(1); 9 L.P.R.A. 2013(a)(2), 2021, The Pledged Toll Revenues likewise constitute trust funds collected and held by PRHTA on behalf of PRHTA Bondholders and are property of the PRHTA Bondholders and not of the Commonwealth. See 9 L.P.R.A. 2013(a)(2). -10-

11 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 11 of 47 Desc: Main 39. The PRHTA Resolutions in turn require PRHTA to transfer the PRHTA Pledged Special Revenues to the fiscal agent for the PRHTA Bonds (the PRHTA Fiscal Agent ) on a monthly basis. The Commonwealth covenanted with the holders of the PRHTA Bonds in the PRHTA Enabling Act that it would not limit or restrict the rights or powers... vested in [PRHTA by the PRHTA Enabling Act] until all such bonds at any time issued, together with the interest thereon, are fully met and discharged. 9 L.P.R.A PRHTA Bonds are non-recourse bonds, payable solely from the PRHTA Pledged Special Revenues. Moreover, because PRHTA Bonds are secured by a gross lien on all of the PRHTA Pledged Special Revenues, operating expenses of PRHTA may only be paid after PRHTA satisfies its debt service and reserve fund requirements with respect to PRHTA Bonds. 41. Assured insures approximately $1.5 billion of PRHTA Bonds currently outstanding, and National insures approximately $708 million of PRHTA Bonds currently outstanding. Under their insurance agreements and/or insurance policies, Plaintiffs are deemed to be the sole owners of the PRHTA Bonds that they insure for purposes of, or otherwise have control rights over, consents and other bondholder actions, including exercising rights and remedies of PRHTA Bondholders. Plaintiffs are also recognized as third-party beneficiaries under the PRHTA Resolutions. 42. On July 1, 2016, PRHTA defaulted on debt service payments aggregating approximately $4.5 million. Of that amount, approximately $4 million of the July 1 default was insured and paid by National and $83, was reinsured and paid by Assured. On January 1, 2017, PRHTA defaulted on a debt service payment totaling approximately $1 million on bonds insured by National. National paid claims to insured bondholders as a result of that default. Plaintiffs are fully subrogated to the rights of the PRHTA Bondholders whose claims they paid. -11-

12 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 12 of 47 Desc: Main 2. PRCCDA Bonds 43. PRCCDA is a public corporation created by Act No (September 2, 2000) (the PRCCDA Enabling Act ) for the purpose of developing and operating a convention center located in San Juan, Puerto Rico, and related improvements and facilities. See 23 L.P.R.A. 6402, Pursuant to the PRCCDA Enabling Act, PRCCDA has issued approximately $468 million of revenue bonds (the PRCCDA Bonds ) under a Trust Agreement dated as of March 24, 2006 (the PRCCDA Trust Agreement ). 44. Pursuant to the PRCCDA Enabling Act, Act No (the Hotel Tax Act ), and the PRCCDA Trust Agreement, the PRCCDA Bonds are secured by a lien on certain hotel occupancy taxes (the PRCCDA Pledged Tax Revenues ) imposed by the Commonwealth and collected by the Puerto Rico Tourism Company pursuant to the Hotel Tax Act. The Puerto Rico Tourism Company is required by statute to transfer the PRCCDA Pledged Tax Revenues to a special account maintained by the Government Development Bank for Puerto Rico in the name of PRCCDA but for the benefit of PRCCDA Bondholders, and the PRCCDA Pledged Tax Revenues constitute trust funds that are property of the PRCCDA Bondholders and not of the Commonwealth. See 13 L.P.R.A. 2271v. 45. The Commonwealth covenanted in the PRCCDA Enabling Act that it would not limit nor alter the rights [conferred on PRCCDA by the PRCCDA Enabling Act] until [the PRCCDA Bonds] and the interest thereon are paid in full. 23 L.P.R.A Moreover, under the PRCCDA Trust Agreement, PRCCDA, as an agent of the Commonwealth, covenanted that the Commonwealth (i) will make sure that the amounts [of the PRCCDA Pledged Tax Revenues] must be deposited in the accounts as provided in the [PRCCDA] Trust Agreement and (ii) will not limit or impair the rights of PRCCDA to comply with its obligations to repay the PRCCDA Bonds in full. -12-

13 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 13 of 47 Desc: Main 46. Assured insures approximately $152 million of the outstanding PRCCDA Bonds. Under a First Supplemental Trust Agreement to the PRCCDA Trust Agreement, dated as of March 24, 2006, Assured is deemed to be a third-party beneficiary and has standing to enforce any right, remedy, or claim. 3. PRIFA Bonds 47. PRIFA is a public corporation created by Act No (the PRIFA Enabling Act, and together with the PRHTA Enabling Act and the PRCCDA Enabling Act, the Authority Enabling Acts ) for the purpose of providing financial and other types of assistance to political subdivisions, public agencies, and instrumentalities of the Commonwealth. Pursuant to the PRIFA Enabling Act, PRIFA has issued certain special tax revenue bonds (the PRIFA Bonds ) under a Trust Agreement dated as of October 1, The aggregate principal amount of PRIFA Bonds outstanding is approximately $1.621 billion. 48. Pursuant to the PRIFA Enabling Act and the PRIFA Trust Agreement, the PRIFA Bonds are secured by a portion of a federal special excise tax imposed on rum and other items produced in the Commonwealth and sold in the United States (the PRIFA Pledged Tax Revenues, and together with the PRHTA Pledged Special Excise Taxes and the PRCCDA Pledged Tax Revenues, the Pledged Special Excise Taxes ). The Commonwealth s Department of Treasury (the Department of Treasury ) is required by statute to transfer the PRIFA Pledged Tax Revenues to PRIFA for the benefit of the PRIFA Bondholders, and the PRIFA Pledged Tax Revenues constitute trust funds that are property of the PRIFA Bondholders and not of the Commonwealth. 3 L.P.R.A In the PRIFA Enabling Act, the Commonwealth covenanted that it would not limit or alter the rights [conferred on PRIFA by the PRIFA Enabling Act] until such bonds and the interest thereon are paid in full. Id

14 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 14 of 47 Desc: Main 49. Assured insures approximately $18 million of the outstanding PRIFA Bonds through secondary market insurance policies. In connection with PRIFA s defaults with respect to debt service payments due on PRIFA Bonds on January, 1, 2016, July 1, 2016, and January 1, 2017, Assured paid $1.4 million in aggregate claims by PRIFA Bondholders and is now fully subrogated to the rights of the PRIFA Bondholders for the claims it paid. II. Lawful Priorities And Liens Under Commonwealth Law 50. A number of provisions of the Commonwealth Constitution and of Commonwealth statutory law define the relative priority of (i) the public debt, including the GO and PBA Bonds; (ii) the Authority Bonds; and (iii) the other obligations of the Commonwealth and Authorities. These constitutional and statutory provisions are incorporated into Plaintiffs contracts with the Commonwealth, PBA, and Authorities. In an earlier decision denying the Commonwealth s motion to dismiss Assured s complaint challenging the Commonwealth s ongoing misappropriation of the Pledged Special Excise Taxes, this Court carefully described and set out these priorities. Assured Guar. Corp. v. García-Padilla, Nos , -1095, 2016 WL , at *1-3 (D.P.R. Oct. 4, 2016). The relevant provisions include the following: A. The Constitutional Debt Priority Provision 51. Section 8 of Article VI of the Commonwealth Constitution (the Constitutional Debt Priority Provision ) creates a priority for GO Bonds, PBA Bonds, and other public debt over the Commonwealth s other expenditures by requiring the public debt to be paid first : In case the available revenues including surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall first be paid, and other disbursements shall thereafter be made in accordance with the order of priorities established by law. P.R. Const. art. VI, 8 (emphasis added). -14-

15 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 15 of 47 Desc: Main 52. Public debt, including GO and PBA Bond debt, thus has priority (the Public Debt Priority ) over all other government expenditures whenever available resources are not sufficient to meet appropriations. Because of its constitutional status, the Public Debt Priority cannot be overridden by the Commonwealth s police power, even in a financial emergency. See, e.g., Flushing Nat l Bank v. Mun. Assistance Corp. for N.Y., 358 N.E.2d 848, 852 (N.Y. 1976) (holding that a fugitive recourse to the police power may not be used to displace inconvenient but intentionally protective constitutional limitations ). 53. Moreover, after giving effect to the Public Debt Priority, the Constitutional Debt Priority Provision incorporates other legal priorities, created by statute, by stating that, following payment of the public debt, other disbursements shall... be made in accordance with the order of priorities established by law. P.R. Const. art. VI, 8. Among the statutory priorities incorporated into the Constitutional Debt Priority Provision and thereby granted constitutional protection are (i) the statutory priorities established by certain provisions (the Authority Bond Priority Provisions ) of the statutes governing the Authority Bonds and (ii) the statutory priorities established by the Commonwealth s Management and Budget Office Organic Act, Act No , the OMB Act ). B. The Authority Bond Priority Provisions 54. In order to make the Authority Bonds attractive to investors, the statutes governing the Authority Bonds grant Authority Bondholders the most senior possible lien on the Pledged Special Excise Taxes consistent with the Constitutional Debt Priority Provision. To this end, these statutes grant Authority Bondholders first-priority liens on the Pledged Special Excise Taxes, subject only to the conditions that, in a fiscal year in which the Constitutional Debt Priority Provision is in effect, the Pledged Special Excise Taxes may (i) be used solely to pay the public debt, but (ii) only if the public debt remains unpaid after a first application of all -15-

16 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 16 of 47 Desc: Main available resources to the payment of public debt. Together, these two preconditions to any clawback of Pledged Special Excise Taxes 2 establish the priority (the Authority Bond Priority ) of the Authority Bonds over all disbursements other than public debt that might be made during a fiscal year in which the Constitutional Debt Priority Provision is in effect. Except where both of these conditions to a clawback have been satisfied, the Authority Bonds are fully secured by statutory and contractual liens on the Pledged Special Excise Taxes and cannot be impaired without violating Commonwealth law and the Contracts, Takings, and Due Process Clauses of the U.S. and Commonwealth Constitutions. As this Court described, [t]he funds from these taxes and tax liens may be used to pay the public debt if no other Commonwealth resources are available. Assured Guar., 2016 WL , at * The Authority Bond Priority, including these two preconditions to any clawback, is expressly set forth in the following Authority Bond Priority Provisions: (a) (b) PRHTA Pledged Tax Revenues Pledged to Payment of PRHTA Bonds: The proceeds of said collection shall be solely used for the payment of interest and amortization of the public debt, as provided in said Section 8 of Item VI of the Constitution, to the extent that all other resources available to which reference is made in said section are insufficient for such purposes. Otherwise, the proceeds of said collection, in the amount that may be necessary, shall be used solely for the payment of the principal and interest on bonds and other obligations of the Authority and to comply with any stipulations agreed to by the latter with the holders of said bonds or other obligations. 13 L.P.R.A (a)(1)(C) (emphasis added). Vehicle Fees Pledged to Payment of PRHTA Bonds: [S]aid pledge or pignoration shall be subject to the provisions of 8 of Article VI of the Constitution of Puerto Rico; Provided, however, That the proceeds of said collection shall only be used for the payment of interest and the amortization of the public debt, as provided in said 8, to the extent that all other resources available, referred to in said section, are insufficient for such purposes, otherwise, the proceeds of said collection in the amount 2 Because the Pledged Toll Revenues do not constitute available resources, they can never be subject to clawback to pay the public debt. -16-

17 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 17 of 47 Desc: Main that is necessary shall be used solely for the payment of the principal and interest on bonds and other obligations of the Authority, and to meet whatever other stipulations are agreed upon between the Authority and the holders of said bonds or other obligations. 9 L.P.R.A (emphasis added); see also 9 L.P.R.A (c) (d) PRCCDA Pledged Tax Revenues Pledged to Payment of PRCCDA Bonds: The product of the collection of the tax shall be used solely for the payment of the interest and the amortization of the public debt, as provided in Section 8 of Article VI of the Constitution of the Commonwealth of Puerto Rico, but only to the degree to which the other available resources to which reference is made in said Section are insufficient for such purposes. Otherwise, the product of said collection, in the amount necessary, shall be used solely for the payment of the principal and interest on the bonds, notes or other obligations and the obligations under any bond related financing agreement contemplated herein, and to comply with any stipulations agreed to with the bondholders, noteholders or holders of other obligations or the providers under bond related financing agreements. 13 L.P.R.A. 2271v(a)(4) (emphasis added). PRIFA Pledged Tax Revenues Pledged to Payment of PRIFA Bonds: [PRIFA] is hereby empowered to segregate a portion of said Funds into one (1) or more sub-accounts, subject to the provisions of Section 8 of Article VI of the Constitution of the Commonwealth of Puerto Rico for the payment of the principal and interest on bonds and other obligations of the Authority, or for the payment of bonds and other obligations issued by a benefited entity, or for any other legal purpose of the Authority. The moneys of the Special Fund may be used for the payment of interest and for the amortization of the public debt of the Commonwealth, as provided in said Section 8, only when the other resources available referred to in said Section are insufficient for such purposes. 3 L.P.R.A (emphasis added). C. The OMB Act 56. In furtherance of the Constitutional Debt Priority Provision, and consistent with the Authority Bond Priority Provisions, Section 4(c) of the OMB Act sets certain priority guidelines for the disbursement of available resources in a fiscal year in which the Constitutional Debt Priority Provision is in effect. The priorities set by the Commonwealth s Legislative Assembly (the Legislative Assembly ) in the OMB Act first require payment of interest and amortizations corresponding to the public debt. 23 L.P.R.A. 104(c)(1). The priority guidelines next assign a second-priority status to commitments entered into by virtue -17-

18 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 18 of 47 Desc: Main of legal contracts in force, judgments of the courts in cases of condemnation under eminent domain, and binding obligations to safeguard the credit, reputation and good name of the Government of the Commonwealth of Puerto Rico, including, to the extent applicable, the Authority Bonds. 3 Id. 104(c)(2). 57. Regular expenses related to government operations receive a thirdpriority status (after public debt and Authority Bonds) under Section 4(c) of the OMB Act, with priority within this group given to expenses related to [c]onservation of public health, [p]rotection of persons and property, [p]ublic education programs, [p]ublic welfare programs, and [p]ayments of employer contributions to retirement systems and payment of pensions to individuals granted under special statutes, followed by remaining public services in the order of priority determined by the Governor. 23 L.P.R.A. 104(c)(3)(A)-(E). Necessary adjustments due to reductions may be made to the appropriations for any of these enumerated service areas. Id. 104(c)(3)(E). 58. Finally, the OMB Act s priority guidelines assign the lowest priorities to construction of capital works or improvements (fourth priority) (23 L.P.R.A. 104(c)(4)) and contracts and commitments contracted under special appropriations (fifth priority) (id. 104(c)(5)). 3 The Pledged Toll Revenues are not subject to the OMB Act waterfall, because they are not general revenues and do not constitute available resources. Similarly, the Pledged Special Excise Taxes are not subject to the OMB Act waterfall, because the Pledged Special Excise Taxes are not general revenues and can never be used for any purpose other than to pay the Authority Bonds or, following a valid clawback, the public debt. Even in the event the OMB Act waterfall were found to apply to the Pledged Special Excise Taxes, however, the Pledged Special Excise Taxes could only be applied to the first two items in the waterfall, namely payment of the public debt or of legal contracts in force (i.e. the Authority Bonds). -18-

19 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 19 of 47 Desc: Main III. PROMESA And The Illegal Fiscal Plan 59. On June 30, 2016, President Barack Obama signed PROMESA into law. The stated purpose of PROMESA is to establish an Oversight Board to assist the Government of Puerto Rico, including instrumentalities, in managing its public finances, and for other purposes. H.R. 5278, 114th Cong. (2016) (preamble). 60. Among other things, PROMESA (i) establishes a process for the Oversight Board to approve a fiscal plan governing the Commonwealth s future finances and budgets (Title II); (ii) establishes a process for the Oversight Board to file a bankruptcy petition on behalf of the Commonwealth or its instrumentalities (Title III); and (iii) provides for an alternative mechanism for adjusting the Commonwealth s bond debt outside of a bankruptcy proceeding by effectuating modifications with the substantial, but not necessarily unanimous, support of the affected bondholders. 61. To qualify as a Fiscal Plan as defined in PROMESA, a fiscal plan must satisfy a series of substantive requirements set forth in Section 201(b)(1). 48 U.S.C. 2141(b)(1). Specifically, Section 5(10) of PROMESA defines a Fiscal Plan as a Territory Fiscal Plan or an Instrumentality Fiscal Plan, and Section 5(22) of PROMESA in turn defines Territory Fiscal Plan as a fiscal plan for a territorial government submitted, approved, and certified in accordance with section [201]. 48 U.S.C. 2104(10), (22) (emphasis added). Because the Illegal Fiscal Plan is not substantively in accordance with section 201[(b)(1)], it does not constitute a Fiscal Plan under PROMESA and cannot be the basis for the filing and confirmation of a plan of adjustment in these Title III proceedings. 62. On March 27, 2017, shortly after the Oversight Board approved the Illegal Fiscal Plan, Assured and numerous other Commonwealth creditors sent a letter ( Exhibit B ) to the Oversight Board alerting its members to the Illegal Fiscal Plan s non-compliance with -19-

20 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 20 of 47 Desc: Main PROMESA and identifying the Illegal Fiscal Plan s many deficiencies. Assured and the other signatories to the March 27 letter received no written response from the Oversight Board. 63. On April 5, 2017, Assured sent a second letter ( Exhibit C ) to the Oversight Board again alerting its members to the Illegal Fiscal Plan s non-compliance with PROMESA and formally requesting that the Oversight Board revoke its certification of the Illegal Fiscal Plan. Assured received no written response from the Oversight Board to its April 5 letter. 64. On April 7, 2017, two members of the United States Senate, Hon. Sen. Thom Tillis and Hon. Tom Cotton (the Senators ), sent a letter ( Exhibit D ) to José B. Carrión III, the chair of the Oversight Board, expressing their concern that the Illegal Fiscal Plan was not compliant with PROMESA because of (i) its failure to comply with lawful priorities and liens established by Puerto Rico s constitution, (ii) its failure to differentiate between non-essential and essential spending, (iii) its elevation of all non-debt spending above debt service, and (iv) its unexplained economic assumptions. 65. On April 25, 2017, the Oversight Board issued a written response ( Exhibit E ) to the Senators. Instead of adequately addressing the Senators concerns, the Oversight Board s April 25 letter essentially conceded that the Illegal Fiscal Plan does not comply with lawful priorities and liens. Specifically, the Oversight Board claimed that the word respect in Section 201(b)(1)(N) means something other than comply with, which in the Oversight Board s view gave the Illegal Fiscal Plan the flexibility to disrespect and violate lawful priorities and liens, a result that would be contrary to generations of federal constitutional and bankruptcy law. See Ex. E at The Oversight Board s position that Section 201(b)(1)(N) s use of the verb respect gives the Illegal Fiscal Plan flexibility to disrespect and violate priorities and liens is -20-

21 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 21 of 47 Desc: Main pure sophistry, because when referring to a legal requirement, to respect means precisely to abide by, as in the crown and its ministers ought to respect the ordinary law The Oversight Board s position on the meaning of respect is therefore contrary to the plain meaning of the statute and at odds with Congress stated intent. According to Congress, Section 201(b)(1)(N) was added to ensure fiscal plans keep intact the structural hierarchy of prioritized debt, 5 and Section 201(b)(1) should not be interpreted to reprioritize pension liabilities ahead of the lawful priorities or liens of bondholders as established under the territory s constitution, laws, or other agreements The Oversight Board also sought in its April 25 letter to justify the Illegal Fiscal Plan s prioritization of general government expenses over debt service by referring to PROMESA 104(i) and 314(b), two sections of PROMESA that have nothing to do with the requirements for certification of a compliant fiscal plan. See Ex. E at 2. Section 104(i) establishes certain requirements that must be satisfied in order to fast track a voluntary agreement with creditors for implementation through Title VI of PROMESA. 48 U.S.C. 2124(i). Section 314(b) in turn establishes certain requirements for confirmation of a plan of adjustment in a Title III proceeding. 48 U.S.C. 2174(b). Although PROMESA encourages voluntary agreements with creditors and, under certain well-defined circumstances, permits the filing and confirmation of a Title III plan of adjustment, nothing in PROMESA requires either voluntary agreements or the filing of Title III plans. By contrast, PROMESA requires the 4 Oxford Living Dictionaries: English, (last visited May 1, 2017) (emphasis added). 5 Memorandum of Full Committee Markup of H.R Before the H. Comm. on Nat. Res., at 3, 114 th Cong. (2016), (emphasis added). 6 H.R. Rep. No , pt. 1, at 45 (2016). -21-

22 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 22 of 47 Desc: Main Oversight Board to develop and approve a fiscal plan that complies with Section 201(b). There is therefore no way that Sections 104(i) and 314(b) could ever override the express requirements of Section 201(b). A. Injuries Caused By The Illegal Fiscal Plan 1. Injuries Caused By The Illegal Fiscal Plan Generally 69. Under PROMESA, once a fiscal plan is certified, all governmental actions, including all actions by Defendants, must comply with the certified fiscal plan. This would include actions taken by applicable Defendants during the pendency of a Title III proceeding. 70. For example, Section 202 of PROMESA requires the budgets of the Commonwealth, the PBA, and the Authorities to comply with a certified fiscal plan. 48 U.S.C Similarly, Section 204 of PROMESA requires future Commonwealth legislation to comply with a certified fiscal plan. 48 U.S.C In addition, Section 314 of PROMESA sets forth the requirements for confirmation of a plan of adjustment in these Title III proceedings. 48 U.S.C One of these requirements is that the plan is consistent with the applicable Fiscal Plan certified by the Oversight Board under [Title] II. Id. 2174(b)(7). Therefore, unless this Court grants the relief requested by Plaintiffs to ensure that the Illegal Fiscal Plan is amended to be made PROMESAcompliant, the Illegal Fiscal Plan likely will control the terms of the plans of adjustment submitted by or on behalf of the debtors in these or related Title III proceedings, in addition to actions taken by Defendants during the pendency of these Title III proceedings. 73. As a direct result of the subordination of debt service to all expenses ordained by the Illegal Fiscal Plan, certain defaults on bonds insured by Plaintiffs have already -22-

23 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 23 of 47 Desc: Main occurred. Further defaults on bonds insured by Plaintiffs are imminent and will occur on July 1, 2017 and thereafter as a result of the implementation of the Illegal Fiscal Plan. Defaults on bonds insured by Plaintiffs will cause significant financial harm to Plaintiffs. Implementation of the Illegal Fiscal Plan through a Title III plan of adjustment would also permanently impair Plaintiffs and bondholders contractual rights and deprive Plaintiffs and bondholders of their property interests in violation of the U.S. Constitution. 74. The full implications and illegality of the Illegal Fiscal Plan can be seen in the Fiscal Plan Act, which was recently enacted to implement the Illegal Fiscal Plan by impairing the contractual rights of Assured and other stakeholders and depriving them of their property without just compensation or due process of law. 2. The Fiscal Plan Act 75. On or about April 29, 2017, the Commonwealth enacted the Fiscal Plan Act. The Fiscal Plan Act fully effectuates the contract impairments and illegal expropriations of property purportedly authorized by the Illegal Fiscal Plan. Chapters 4 and 6 ( Exhibit F ) of the Fiscal Plan Act are particularly egregious and obviously illegal and unconstitutional. Chapter 4, entitled Transfer Of Profits From Authorities To The General Fund, purportedly authorizes the Commonwealth to simply misappropriate secured bondholder collateral and other property to which the Commonwealth has no legal entitlement. Chapter 6, meanwhile, similarly purports to authorize the Commonwealth to simply appropriate for its own use trust funds held in special accounts in the Commonwealth treasury for the benefit of the Authorities and their bondholders. (a) Chapter 4 Of The Fiscal Plan Act 76. Article 4.01 of Chapter 4 of the Fiscal Plan Act provides for the Commonwealth to expropriate property in the form of surplus revenues from its public corporations and their bondholders: -23-

24 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 24 of 47 Desc: Main Article Transfer of Surplus Public corporations, agencies and instrumentalities of the Government of Puerto Rico are hereby directed to transfer to the Department of the Treasury the surplus of the income produced. These funds will be considered as available resources of the State and deposited by the Department of the Treasury in the General Fund of the Government of Puerto Rico to meet the liquidity requirements set out in the Fiscal Plan adopted under the provisions of Puerto Rico Oversight, Management and Economic Stability Act of 2016 Public Law , also known as PROMESA. 77. Article 4.02 of Chapter 4 of the Fiscal Plan Act in turn purports to establish a Committee empowered to determine what amounts of bondholder collateral are to be expropriated from the Commonwealth s public corporations and transferred to the Commonwealth pursuant to Article 4.01: Article Committee The amount of funds that each of the corporations and instrumentalities will provide will be determined by a committee composed of the [AAFAF Executive Director], the [Secretary of Treasury] and the Executive Director of the Office of Management and Budget, who may establish the necessary tariffs to comply with the provisions of the Fiscal Plan approved for the Government of Puerto Rico and the one which will rule its corporations. This committee will ensure that the transfer of funds as provided in Article 4.01 of this Act do not affect the services provided by public corporations and instrumentalities, and only consist of the available surplus after the operating expenses and obligations of these entities have been covered in accordance with the budgeted expenses approved by the Office of Management and Budget for each fiscal year. 78. Chapter 4 makes absolutely no provision for payment by the Authorities of their secured debt. Instead, under Chapter 4, the Commonwealth authorizes itself simply to steal the Pledged Special Revenues pledged to payment of the Authority Bonds. 79. Equally unlawfully and unconstitutionally, Chapter 4 defines the revenues that the Commonwealth may expropriate to include all revenues that do not constitute operating -24-

25 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 25 of 47 Desc: Main expenses and obligations of the relevant Authority. In the case of Authorities, such as PRHTA, that have given a gross pledge of their revenues to bondholders, Chapter 4 reverses the priorities established by the gross pledge, essentially providing that operating expenses of the Authority have a first priority status over all of its other obligations, including its debt obligations. 80. Moreover, Article 4.02 defines as available resources those Pledged Special Revenues (the Operating Revenues ) that are generated by an Authority itself and not assigned to the Authority by the Commonwealth, such as Pledged Toll Revenues generated by PRHTA s operations. Such Operating Revenues do not constitute available resources under the Commonwealth Constitution and are not subject to clawback by the Commonwealth even under the very limited circumstances under which a clawback of the Pledged Special Excise Taxes is permitted. The Commonwealth s misappropriation of these Operating Revenues under Chapter 4 simply constitutes theft. (b) Chapter 6 Of The Fiscal Plan Act 81. Chapter 6 of the Fiscal Plan Act amends Act No (July 23, 1974), known as the Government Accounting Act of Puerto Rico (as amended, the Accounting Act ), among other things by providing under Article 7(a) and (e) of the Accounting Act, as amended: [A]ll of the state special funds and other revenues of dependencies and public corporations after July 1, 2017, shall be deposited in their totality in the State Treasury under the custody of the Secretary of the Treasury or in the banking institution that he deems adequate After July 1st, 2017, all those special state funds created by law for specific purposes will be used for those purposes for which they were assigned by Law in accordance with the Budget recommended by the Office of Management and Budget and with the Fiscal Plan.... If -25-

26 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 26 of 47 Desc: Main there is any inconsistency between the law and the use of funds with the Fiscal Plan, the purpose provided in Fiscal Plan approved under the provisions of the Federal Law PROMESA shall prevail. (emphasis added). 82. Funds held in special funds in the Commonwealth treasury include Pledged Special Revenues assigned to the Authorities by law and constituting trust funds held by the Department of Treasury on behalf of the relevant Authority for the benefit of its bondholders. In particular, the PRHTA Pledged Special Excise Taxes are held in a special fund in the Commonwealth Treasury on PRHTA s behalf for the benefit of its bondholders prior to transfer to the PRHTA Fiscal Agent. By conditioning the uses of these special funds on their being in accordance with the Budget recommended by the Office of Management and Budget and with the Fiscal Plan, Chapter 6 subverts the purposes for which the Pledged Special Revenues were assigned by law. Indeed, the Illegal Fiscal Plan mandates an unlawful treatment of the Pledged Special Revenues that does not accord with the liens and priorities established by law. 83. Chapter 6 further flaunts the fact that the Illegal Fiscal Plan deprives bondholders of their statutory entitlements and substantially impairs their contractual rights, stating, If there is any inconsistency between the law and the use of funds with the Fiscal Plan, the purpose provided in Fiscal Plan... shall prevail. The admitted effect of the Illegal Fiscal Plan, then, is to deprive Plaintiffs and other parties of benefits and other property interests to which they are entitled by law. -26-

27 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 27 of 47 Desc: Main IV. The Illegal Fiscal Plan And The Fiscal Plan Act Violate PROMESA 84. The Illegal Fiscal Plan and the Fiscal Plan Act fail to comply with numerous substantive requirements of PROMESA. 7 Specific provisions of PROMESA violated by the Illegal Fiscal Plan and the Fiscal Plan Act include the following: A. The Illegal Fiscal Plan And The Fiscal Plan Act Fail To Respect Lawful Priorities And Liens (PROMESA 201(b)(1)(N) And 201(b)(1)(B)) 85. Section 201(b)(1)(N) of PROMESA requires a fiscal plan to respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality in effect prior to the date of enactment of [PROMESA]. 48 U.S.C. 2141(b)(1)(N). 86. As set forth above, the Constitutional Debt Priority Provision, the Authority Bond Priority Provisions, and the OMB Act together establish the lawful priorities in effect prior to the enactment of PROMESA. The Illegal Fiscal Plan as implemented through the Fiscal Plan Act violates the Public Debt Priority and the Authority Bond Priority, however, because it assumes that all non-debt expenses of the Commonwealth government are to be paid before any payments are made for debt service. By contrast, a compliant fiscal plan would require that (i) the public debt must be paid first from all available resources, that (ii) the Authority Bonds must be paid from the Pledged Special Revenues (except in the unlikely scenario that the public debt remains unpaid after a first application of all available resources to the payment of such public debt), and that (iii) the remaining available resources must be budgeted to other government expenditures in accordance with the priorities set out in the OMB Act. 7 Plaintiffs reserve the right to challenge the legality of the procedure through which the Oversight Board determined to certify the Illegal Fiscal Plan. -27-

28 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 28 of 47 Desc: Main 87. The Illegal Fiscal Plan openly acknowledges its own non-compliance with Section 201(b)(1)(N), because it does not even take a position on the existence of the relevant priorities and liens: The Fiscal Plan as proposed... does [not] take a position with respect to asserted constitutional or contractual rights and remedies, validity of any bond structure, or the dedication or application of tax streams/available resources. Ex. A at 5. A determination of each of the cited items would be necessary in order for the Illegal Fiscal Plan to demonstrate its compliance with Section 201(b)(1)(N), however. 88. The Illegal Fiscal Plan also violates the priorities established by Section 4(c)(3) of the OMB Act by failing even to attempt to prioritize as between different categories of third priority regular expenses of government. Indeed, the Illegal Fiscal Plan openly acknowledges that it does not reflect any attempt at differentiation between higher priority essential services and lower priority non-essential services, because it includes within its list of Legal and Contractual Issues not determined by the Fiscal Plan the issue of What is an essential service for purposes of the exercise of the Government s police power. Ex. A at 6. This is contrary to the OMB Act s express requirement that expenditures related to health, public safety, education, and welfare be given priority over other, less essential government services and over capital improvements, albeit in both cases only after the payment first of public debt and the Authority Bonds. 89. The Illegal Fiscal Plan s failure to differentiate between essential and nonessential services is also contrary to Section 201(b)(1)(B) of PROMESA, which requires a fiscal plan to provide for the funding of essential public services. 48 U.S.C.A. 2141(b)(1)(B) (emphasis added). Because the Illegal Fiscal Plan does not even identity which services are essential, it does not satisfy this requirement of Section 201(b) and is not in accordance with section

29 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 29 of 47 Desc: Main 90. The Illegal Fiscal Plan and the Fiscal Plan Act also violate the lawful liens in effect prior to the enactment of PROMESA, because they unlawfully commingle the Pledged Special Revenues, which are property of the Authority Bondholders, with the Commonwealth s unencumbered revenues and assume that these Pledged Special Revenues can be used to fund any and all Commonwealth expenses. The Illegal Fiscal Plan and the Fiscal Plan Act cannot override those liens. Congress retained the special revenue provisions of the Bankruptcy Code in PROMESA. See 48 U.S.C (incorporating sections 922 and 928 of the Bankruptcy Code). Accordingly, liens securing Authority Bonds, among others, remain enforceable against revenues received after the filing of a Title III petition. 11 U.S.C. 928(a). Further, the filing of a Title III petition does not operate as a stay against the application of pledged special revenues for debt service. Id. 922(d). Finally, the Pledged Special Excise Taxes constitute special excise taxes, and such pledged special excise taxes are not subject to, and may not be used to fund, the necessary operating expenses of PRHTA or the Commonwealth. Id. 928(b). 91. Similarly, the Illegal Fiscal Plan and the Fiscal Plan Act fail to first use unencumbered available Commonwealth resources to pay public debt, as required by the Constitutional Debt Priority Provision and the Authority Bond Priority, and fail to segregate Pledged Special Revenues for the payment of the Authority Bonds or of the public debt, which are the only two purposes for which such Pledged Special Revenues could ever possibly be used. B. The Illegal Fiscal Plan Requires, And The Fiscal Plan Act Implements, The Misappropriation Of Pledged Special Revenues (PROMESA 201(b)(1)(M)) 92. The Illegal Fiscal Plan and the Fiscal Plan Act also violate Section 201(b)(1)(M) of PROMESA, which requires a compliant fiscal plan to ensure that assets, funds, or resources of a territorial instrumentality are not loaned to, transferred to, or otherwise used for the benefit of a covered territory or another covered territorial instrumentality of a covered -29-

30 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 30 of 47 Desc: Main territory, unless permitted by the constitution of the territory, an approved plan of adjustment under [Title] III, or a Qualifying Modification approved under [Title] VI[.] 48 U.S.C. 2141(b)(1)(M). By its plain terms, this section of PROMESA expressly prohibits the unlawful commingling of Pledged Special Revenues with Commonwealth general funds. 93. As set forth above, the Illegal Fiscal Plan and the Fiscal Plan Act fail to preserve the segregation of the Pledged Special Revenues and instead simply commingle the Pledged Special Revenues with the Commonwealth s general revenues. However, the Pledged Special Revenues are either generated directly by the relevant entity (in the case of the Pledged Toll Revenues) or are assigned to the relevant entity by statute for the benefit of bondholders 8 (in the case of the other Pledged Special Revenues). As such, the Pledged Special Revenues constitute assets, funds, [and] resources of the relevant territorial instrumentality (i.e. an Authority) that cannot legally be loaned to, transferred to, or otherwise used for the benefit of the Commonwealth. 94. However, the Illegal Fiscal Plan expressly acknowledges that it consolidates available cash resources that can be made available for debt service payments, and it includes Pledged Special Revenues in this consolidated calculation of resources available for Commonwealth debt service. See Ex. A at 5-6. The Fiscal Plan Act in turn establishes a precise mechanism for the illegal transfer of Pledged Special Revenues from the Authorities to the Commonwealth. 95. The use of Pledged Special Revenues to fund Commonwealth general expenditures under the Illegal Fiscal Plan and the Fiscal Plan Act thus violates Section 8 See 13 L.P.R.A (a)(1) (governing Special Excise Taxes assigned to PRHTA); 9 L.P.R.A. 2021, 5681 (governing Vehicle Fees assigned to PRHTA); 13 L.P.R.A. 2271v (governing PRCCDA Pledged Tax Revenues); 3 L.P.R.A (governing PRIFA Pledged Tax Revenues). -30-

31 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 31 of 47 Desc: Main 201(b)(1)(M), again rendering the Illegal Fiscal Plan and the Fiscal Plan Act non-compliant and in violation of PROMESA. C. The Illegal Fiscal Plan Fails To Provide For Estimates Of Revenues And Expenditures Based On Applicable Laws (PROMESA 201(b)(1)(A)(i)) 96. Section 201(b)(1)(A)(i) of PROMESA requires a compliant fiscal plan to provide for estimates of revenues and expenditures in conformance with agreed accounting standards and be based on applicable laws; or specific bills that require enactment in order to reasonably achieve the projections of the Fiscal Plan. 48 U.S.C. 2141(b)(1)(A). The revenue and expenditure estimates in the Illegal Fiscal Plan are not based on applicable laws, because these revenue and expenditure estimates simply assume, without explanation, that (i) all general government expenditures can be funded before debt service, in violation of the Public Debt Priority and the Authority Bond Priority, and that (ii) Pledged Special Revenues are available for use by the Commonwealth to fund its general expenditures, notwithstanding the fact that these Pledged Special Revenues constitute property of the relevant bondholders and can only be used to make payments on the bonds to which they are pledged. 97. The revenue and expenditure estimates in the Illegal Fiscal Plan are also not based on any specific bills pending at the time the Illegal Fiscal Plan was developed that would have permitted the Commonwealth to violate the Public Debt Priority and the Authority Bond Priority in the manner envisioned by the Illegal Fiscal Plan. Any such bills, including the subsequently proposed and enacted Fiscal Plan Act, would in any case have been unconstitutional under the U.S. and Commonwealth Constitutions upon enactment, meaning that they could not have formed an appropriate or realistic basis for the Commonwealth s revenue and expenditure projections. Therefore, the Illegal Fiscal Plan violates Section 201(b)(1)(A)(i) of PROMESA. -31-

32 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 32 of 47 Desc: Main D. The Illegal Fiscal Plan And The Fiscal Plan Act Fail To Provide For Fiscal Responsibility Or Access To Capital Markets (PROMESA 101(a), 201(b)(1)) 98. Most fundamentally, the Illegal Fiscal Plan and the Fiscal Plan Act fail to achieve the overarching purpose of the Oversight Board as identified in Section 101(a) of PROMESA, which is to provide a method for [Puerto Rico] to achieve fiscal responsibility and access to the capital markets. 48 U.S.C. 2121(a). Reiterating this overarching purpose of PROMESA, Section 201(b)(1) similarly expressly requires a compliant fiscal plan to provide a method to achieve fiscal responsibility and access to the capital markets. Id. 2141(b)(1). 99. The Illegal Fiscal Plan, as implemented through the Fiscal Plan Act, does nothing to help Puerto Rico achieve fiscal responsibility, because it leaves in place a pro forma level of government expenses before payment of public and other debt that is not lower than 2016 and does not attempt to differentiate between expenses for essential services and expenses for non-essential services. See Ex. A at Moreover, the Illegal Fiscal Plan includes an incremental $6.2 billion Reconciliation Adjustment designed to provide the Commonwealth with an annual cushion of approximately $600 million to pay for non-budgeted expenses. See Ex. A at 14. The inclusion of this massive contingency reserve is contrary to the express language of PROMESA, which requires a compliant fiscal plan to provide for the elimination of structural deficits (48 U.S.C. 2141(b)(1)(D)) and which requires the Oversight Board to respond to any noncompliance by the Commonwealth with its Board-approved budget by mak[ing] appropriate reductions in nondebt expenditures (id. 2143(d)(1)) (emphasis added). The Illegal Fiscal Plan also fails to take into account any reductions in expenses that could result from successful privatization of government assets. -32-

33 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 33 of 47 Desc: Main 101. Similarly, the Illegal Fiscal Plan, as implemented through the Fiscal Plan Act, impedes, rather than enhances, Puerto Rico s access to the capital markets by undermining investor confidence in Puerto Rico s commitment to debt repayment and creditor rights. So long as the Illegal Fiscal Plan and the Fiscal Plan Act continue to disregard the Public Debt Priority, the Authority Bond Priority, and Section 201(b)(1) of PROMESA, the Commonwealth will continue to have no access to the capital markets. Renewed access to the capital markets is essential, however, if the Commonwealth is to implement the types of pro-growth measures that can provide a long-term solution to its financial difficulties. In this context, it is significant that the Illegal Fiscal Plan fails to incorporate any of the recommendations made by the Congressional Task Force on Economic Growth in Puerto Rico created by Section 409(a) of PROMESA in its December 20, 2016 Report to the House and Senate, which details numerous economic initiatives that the Commonwealth could undertake through a combination of better utilization of federal resources and new infusions of private investment. V. The Illegal Fiscal Plan And The Fiscal Plan Act Violate The U.S. Constitution 102. In addition to violating PROMESA itself, the Illegal Fiscal Plan and the Fiscal Plan Act violate the Contracts, Takings, and Due Process Clauses of the U.S. Constitution. A. The Illegal Fiscal Plan And The Fiscal Plan Act Violate The Contracts Clause 103. The Contracts Clause of Article I of the U.S. Constitution (the Contracts Clause ) provides that [n]o State shall... pass any... Law impairing the Obligation of Contracts[.] U.S. Const. art. I, 10, cl. 1 (emphasis added). The primary purpose behind the enactment of the Contracts Clause was to prevent States from adopting laws that would permit borrowers (including the States) to abrogate their debts at the expense of creditors. -33-

34 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 34 of 47 Desc: Main 104. The Fiscal Plan Act constitutes a law that was passed by the Commonwealth. In addition, and independently of its implementation through the Fiscal Plan Act, the Illegal Fiscal Plan itself also has the force of law and constitutes a law for purposes of the Contracts Clause. Among other things, the Illegal Fiscal Plan dictates to the Legislative Assembly what types of budgets (PROMESA 202) and other legislation (PROMESA 204) it may pass. Accordingly, in authorizing the Oversight Board to approve fiscal plans, the U.S. Congress clearly delegated a portion of the Commonwealth s legislative power to the Oversight Board The Illegal Fiscal Plan and the Fiscal Plan Act substantially impair the contractual rights of bondholders and of Plaintiffs. Plaintiffs insured, and bondholders purchased, the GO Bonds, the PBA Bonds, and the Authority Bonds (collectively, the Bonds ) in reliance on the Public Debt Priority and the Authority Bond Priority, both of which priorities were incorporated into Bondholders and Plaintiffs contracts with the Commonwealth, PBA, and the Authorities. Moreover, Plaintiffs insured the Authority Bonds in reliance on the Authorities promises to pledge the Pledged Special Revenues exclusively to the payment of the relevant Bonds, subject only to the Constitutional Debt Priority Provision and the Authority Bond Priority Provisions. However, by (i) altering these priorities and (ii) diverting Pledged Special Revenues from their contractually agreed upon purposes, the Illegal Fiscal Plan and the Fiscal Plan Act substantially impair (i) the contractual rights of GO and PBA Bondholders to be paid on a first-priority basis from available resources and (ii) the contractual rights of Authority Bondholders and Plaintiffs to be secured by, and ultimately paid from, the Pledged Special Revenues The Commonwealth also covenanted with Authority Bondholders in the Authority Enabling Acts that it would not limit or restrict the rights or powers vested in the -34-

35 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 35 of 47 Desc: Main Authorities until all Authority Bonds had been paid in full. See 9 L.P.R.A (covenant with PRHTA Bondholders); 23 L.P.R.A (covenant with PRCCDA Bondholders); 3 L.P.R.A (covenant with PRIFA Bondholders). By limiting the Authorities rights and powers to fulfill the terms of their pledge of Pledged Special Revenues to the payment of Authority Bonds, the Illegal Fiscal Plan and the Fiscal Plan Act impair the Commonwealth s covenants with Authority Bondholders The Commonwealth, including the Oversight Board, cannot justify this substantial impairment of Plaintiffs and Bondholders rights by claiming that it was exercising the Commonwealth s police power in enacting the Illegal Fiscal Plan and the Fiscal Plan Act, because the police power cannot override constitutional limitations. See, e.g., Flushing, 358 N.E.2d at 852 (holding that a fugitive recourse to the police power may not be used to displace inconvenient but intentionally protective constitutional limitations ). The Commonwealth, including the Oversight Board as an entity within the [Commonwealth] government, therefore has no power to override the Constitutional Debt Priority Provision or the statutory priorities incorporated therein, including the Authority Bond Priority Alternatively, even if the Commonwealth was permitted to exercise its police power to override the Commonwealth Constitution, it could do so only to the extent the resulting impairments of Plaintiffs and of bondholders contractual rights constituted a reasonable and necessary means of serving an important public purpose. As set forth above, the substantial contractual impairments effected through the Illegal Fiscal Plan and the Fiscal Plan Act do not serve a public purpose, because these impairments will serve only to lock the Commonwealth out of the capital markets for the foreseeable future, impeding Puerto Rico s economic recovery and harming its people. Moreover, these substantial impairments are neither necessary nor reasonable because the Commonwealth and Oversight Board had many more -35-

36 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 36 of 47 Desc: Main reasonable alternatives for dealing with the Commonwealth s fiscal difficulties. Indeed, the obvious alternative to the approval and subsequent implementation of the Illegal Fiscal Plan would have been to approve and implement a fiscal plan that actually complied with PROMESA by providing a method for the Commonwealth to achieve fiscal responsibility For example, the Oversight Board and the Commonwealth could have addressed the Commonwealth s economic difficulties by, among other things: Approving and implementing a fiscal plan that required the Commonwealth to adjust its budget in accordance with the priority guidelines set forth in the OMB Act. Notably, the Illegal Fiscal Plan itself assumes approximately $19 billion in revenues for Fiscal Year 2017, meaning that the Commonwealth and its instrumentalities could pay their approximately $3.5 billion in annual debt service (including for PBA, the Authorities, and all other Commonwealth bond issuers) and still have approximately $15.5 billion to fund other expenses. Thus, based on a proposed nondebt expense line item of approximately $18 billion in 2017, the Commonwealth could pay all debt service if it merely undertook a modest 13% trimming of nondebt expenses. Importantly, this is a conservative analysis that gives full credence to the Commonwealth s unsubstantiated claim that the approximately $600 million per annum Reconciliation Adjustment included in the Illegal Fiscal Plan reflects real expenses. Approving and implementing a fiscal plan that distinguished between essential and non-essential services, as required by Section 201(b)(1)(B) of PROMESA, and that prioritized essential over non-essential services. Approving and implementing a fiscal plan that, instead of including an illegal $6.2 billion contingency reserve to cover unbudgeted expenses, assumed that the Commonwealth would eliminate structural deficits as required by Section 201(b)(1)(D) of PROMESA. Approving and implementing a fiscal plan that, instead of including an illegal $6.2 billion contingency reserve, assumed that the Commonwealth would be required to comply with its future budgets by making appropriate reductions in nondebt expenditures when necessary. Approving and implementing a fiscal plan that required the Commonwealth to raise additional revenues, as required by the Commonwealth Constitution in a fiscal year in which appropriations exceed estimated resources. See P.R. Const. art. VI,

37 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 37 of 47 Desc: Main Negotiating a consensual restructuring of the Commonwealth s debt, similar to the recently-negotiated restructuring of the debts of the Puerto Rico Electric Power Authority. Notably, PROMESA itself, through Section 104(i), encourages such voluntary agreements with creditors, and Title VI of PROMESA provides a mechanism by which they can be effectively implemented In view of these more reasonable PROMESA-compliant alternatives, the Illegal Fiscal Plan and the Fiscal Plan Act do not constitute reasonable or necessary means of serving an important public purpose and therefore violate the Contracts Clause. B. The Illegal Fiscal Plan And The Fiscal Plan Act Violate The Takings And Due Process Clauses 111. The Takings Clause of the Fifth Amendment to the U.S. Constitution (the Takings Clause ) provides that private property [shall not] be taken for public use, without just compensation. U.S. Const. amend. V. The Takings Clause applies to the States, and the Commonwealth, by virtue of Section 1 of the Fourteenth Amendment to the U.S. Constitution (the Due Process Clause ), which provides, No State... shall... deprive any person of life, liberty, or property, without due process of law. See id. amend. XIV, The Pledged Special Revenues constitute property (i) of Authority Bondholders and (ii) of the Authorities in their capacity as trustees for the bondholders. The Pledged Special Revenues do not constitute property of the Commonwealth or the other Defendants. To the extent Defendants are permitted to hold the Pledged Special Revenues, they hold them in trust for the benefit of the Authority Bondholders Moreover, Authority Bondholders have a lien on the Pledged Special Revenues. A lien is a property interest protected by the Takings and Due Process Clauses. As express third party beneficiaries of the lien on the Pledged Special Revenues, Plaintiffs have a lawful property right and interest in the Pledged Special Revenues, protected by the Fifth Amendment. -37-

38 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 38 of 47 Desc: Main 114. GO and PBA Bondholders are also entitled by the Constitutional Debt Priority Provision to receive payment of the GO and PBA Bonds on a first-priority basis, and Authority Bondholders are entitled by the Constitutional Debt Priority Provision and by statute to receive the Pledged Special Revenues. A constitutional or statutory entitlement to receive a benefit constitutes a property interest protected by the Takings and Due Process Clauses In addition, GO Bondholders and PBA Bondholders have a contractual right to receive payment on a first-priority basis from available resources, and Authority Bondholders have a contractual right to receive payment from the Pledged Special Revenues. A contractual right constitutes a form of property for purposes of the Takings and Due Process Clauses The Illegal Fiscal Plan and the Fiscal Plan Act thus violate the Takings and Due Process Clauses by requiring and authorizing the Commonwealth to take Plaintiffs and Bondholders property without providing Plaintiffs and Bondholders with just compensation or with due process of law. FIRST CLAIM FOR RELIEF (For Declaratory Relief Pursuant To 28 U.S.C And 2202 For Violations Of Section 201(b)(1)(N) Of PROMESA, Against All Defendants) 117. Plaintiffs repeat and reallege the allegations contained in paragraphs 1 through 117 hereof, as if fully set forth herein Plaintiffs are entitled to an order declaring that the Illegal Fiscal Plan and the Fiscal Plan Act violate Section 201(b)(1)(N) of PROMESA, because they do not respect the relative lawful priorities and lawful liens in the constitution, other laws, and agreements of the Commonwealth, PBA, and the Authorities in effect prior to the date of enactment of PROMESA. -38-

39 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 39 of 47 Desc: Main 119. An actual and justiciable controversy has arisen and exists between the parties with respect to these issues and claims and a declaratory judgment is necessary to resolve such controversy. SECOND CLAIM FOR RELIEF (For Declaratory Relief Pursuant To 28 U.S.C And 2202 For Violations Of Section 201(b)(1)(M) Of PROMESA, Against All Defendants) 120. Plaintiffs repeat and reallege the allegations contained in paragraphs 1 through 120 hereof, as if fully set forth herein Plaintiffs are entitled to an order declaring that the Illegal Fiscal Plan and the Fiscal Plan Act violate Section 201(b)(1)(M) of PROMESA, because they fail to ensure that assets, funds, or resources of a territorial instrumentality are not illegally loaned to, transferred to, or otherwise used for the benefit of a covered territory or another covered territorial instrumentality of a covered territory, and indeed require and implement such illegal transfers An actual and justiciable controversy has arisen and exists between the parties with respect to these issues and claims and a declaratory judgment is necessary to resolve such controversy. THIRD CLAIM FOR RELIEF (For Declaratory Relief Pursuant To 28 U.S.C And 2202 For Violations Of Section 201(b)(1)(A)(i) Of PROMESA, Against All Defendants) 123. Plaintiffs repeat and reallege the allegations contained in paragraphs 1 through 123 hereof, as if fully set forth herein Plaintiffs are entitled to an order declaring that the Illegal Fiscal Plan violates Section 201(b)(1)(A)(i) of PROMESA, because it fails to provide for estimates of revenues and expenditures based on applicable laws. -39-

40 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 40 of 47 Desc: Main 125. An actual and justiciable controversy has arisen and exists between the parties with respect to these issues and claims and a declaratory judgment is necessary to resolve such controversy. FOURTH CLAIM FOR RELIEF (For Declaratory Relief Pursuant To 28 U.S.C And 2202 For Violations Of Sections 101(a) and 201(b) Of PROMESA, Against All Defendants) 126. Plaintiffs repeat and reallege the allegations contained in paragraphs 1 through 126 hereof, as if fully set forth herein Plaintiffs are entitled to an order declaring that the Illegal Fiscal Plan and the Fiscal Plan Act violate Sections 101(a) and 201(b) of PROMESA, because they fail to provide a method for the Commonwealth to achieve fiscal responsibility and access to the capital markets An actual and justiciable controversy has arisen and exists between the parties with respect to these issues and claims and a declaratory judgment is necessary to resolve such controversy. FIFTH CLAIM FOR RELIEF (For Declaratory Relief Pursuant To 28 U.S.C And 2202 For Violations Of Section 201(b)(1)(B) Of PROMESA, Against All Defendants) 129. Plaintiffs repeat and reallege the allegations contained in paragraphs 1 through 129 hereof, as if fully set forth herein Plaintiffs are entitled to an order declaring that the Illegal Fiscal Plan and the Fiscal Plan Act violate Section 201(b)(1)(B) of PROMESA, because they fail to distinguish between essential and non-essential services and ensure the funding of only essential services An actual and justiciable controversy has arisen and exists between the parties with respect to these issues and claims and a declaratory judgment is necessary to resolve such controversy. -40-

41 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 41 of 47 Desc: Main SIXTH CLAIM FOR RELIEF (For Declaratory Relief Pursuant To 28 U.S.C And 2202 For A Declaration Under Sections 5(10) and 5(22) Of PROMESA, Against All Defendants) 132. Plaintiffs repeat and reallege the allegations contained in paragraphs 1 through 132 hereof, as if fully set forth herein Plaintiffs are entitled to an order declaring that the Illegal Fiscal Plan does not constitute a Fiscal Plan as defined in Sections 5(10) and 5(22) of PROMESA, because it is not in accordance with section 201 of PROMESA. 48 U.S.C. 2104(10), (22) An actual and justiciable controversy has arisen and exists between the parties with respect to these issues and claims and a declaratory judgment is necessary to resolve such controversy. SEVENTH CLAIM FOR RELIEF (For Declaratory Relief Pursuant To 28 U.S.C And 2202 For Violations Of The Contracts Clause, Against All Defendants Other Than The Commonwealth) 135. Plaintiffs repeat and reallege the allegations contained in paragraphs 1 through 135 hereof, as if fully set forth herein The Illegal Fiscal Plan and the Fiscal Plan Act substantially interfere with and impair Plaintiffs contractual rights and the contractual rights of GO, PBA, and Authority Bondholders Plaintiffs are entitled to an order declaring that the Illegal Fiscal Plan and the Fiscal Plan Act are unconstitutional in that they violate the Contracts Clause An actual and justiciable controversy has arisen and exists between the parties with respect to these issues and claims and a declaratory judgment is necessary to resolve such controversy. -41-

42 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 42 of 47 Desc: Main EIGHTH CLAIM FOR RELIEF (For Declaratory Relief Pursuant To 28 U.S.C And 2202 For Violations Of The Takings and Due Process Clauses, Against All Defendants Other Than The Commonwealth) 139. Plaintiffs repeat and reallege the allegations contained in paragraphs 1 through 139 hereof, as if fully set forth herein Pursuant to the Illegal Fiscal Plan and the Fiscal Plan Act, Defendants have taken and continue to take the Plaintiffs property and the property of GO, PBA, and Authority Bondholders without just compensation or due process of law Plaintiffs are entitled to an order declaring that the Illegal Fiscal Plan and the Fiscal Plan Act are unconstitutional in that they violate the Takings and Due Process Clauses An actual and justiciable controversy has arisen and exists between the parties with respect to these issues and claims and a declaratory judgment is necessary to resolve such controversy. NINTH CLAIM FOR RELIEF (Injunctive Relief For Violations Of PROMESA And The U.S. Constitution, Against All Defendants) 143. Plaintiffs repeat and reallege the allegations contained in paragraphs 1 through 143 hereof, as if fully set forth herein The Illegal Fiscal Plan and the Fiscal Plan Act violate Section 201(b)(1)(N) of PROMESA; violate Section 201(b)(1)(M) of PROMESA; violate Sections 101(a) and 201(b) of PROMESA; violate Section 201(b)(1)(B) of PROMESA; are unconstitutional and violate the Contracts Clause; and are unconstitutional and violate the Takings and Due Process Clauses In addition, the Illegal Fiscal Plan violates Section 201(b)(1)(A)(i) of PROMESA and does not constitute a Fiscal Plan as defined in PROMESA. -42-

43 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 43 of 47 Desc: Main 146. Plaintiffs are entitled to an injunction prohibiting Defendants from presenting or proceeding with confirmation of any plan of adjustment based on the Illegal Fiscal Plan and the Fiscal Plan Act, or taking or causing to be taken any other action pursuant to the Illegal Fiscal Plan and the Fiscal Plan Act Unless Defendants are enjoined from presenting or proceeding with confirmation of any plan of adjustment based on the Illegal Fiscal Plan and the Fiscal Plan Act, or taking or causing to be taken any other action pursuant to the Illegal Fiscal Plan and the Fiscal Plan Act, Plaintiffs will be irreparably harmed. There is no adequate remedy at law The balance of the hardships are in favor of Plaintiffs due to the irreparable harm Plaintiffs will suffer if Defendants are not enjoined from presenting or proceeding with confirmation of any plan of adjustment based on the Illegal Fiscal Plan and the Fiscal Plan Act, or taking or causing to be taken any other action pursuant to the Illegal Fiscal Plan and the Fiscal Plan Act. Defendants will not be unduly harmed if they are so enjoined. Injunctive relief is in the public interest. TENTH CLAIM FOR RELIEF (For A Stay Pursuant To 11 U.S.C. 105(a) And (d) Of Title III Confirmation Proceedings) 149. Plaintiffs repeat and reallege the allegations contained in paragraphs 1 through 149 hereof, as if fully set forth herein The Illegal Fiscal Plan violates Section 201(b)(1)(N) of PROMESA; violates Section 201(b)(1)(M) of PROMESA; violates Section 201(b)(1)(A)(i) of PROMESA; violates Sections 101(a) and 201(b) of PROMESA; violates Section 201(b)(1)(B) of PROMESA; does not constitute a Fiscal Plan as defined in PROMESA; is unconstitutional under the Contracts Clause; and is unconstitutional under the Takings and Due Process Clauses. -43-

44 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 44 of 47 Desc: Main 151. Plaintiffs respectfully request that this Court exercise its powers under 11 U.S.C. 105(a) and (d) to issue a stay of the confirmation of any plan of adjustment in these Title III proceedings pending development of a fiscal plan compliant with PROMESA and the U.S. Constitution. RELIEF DEMANDED 152. WHEREFORE Plaintiffs Assured Guaranty Corp., Assured Guaranty Municipal Corp., and National Public Finance Guarantee Corporation respectfully request that the Court enter judgment against Defendants as follows: (a) Declaring that the Illegal Fiscal Plan and the Fiscal Plan Act violate Section 201(b)(1)(N) of PROMESA; (b) Declaring that the Illegal Fiscal Plan and the Fiscal Plan Act violate Section 201(b)(1)(M) of PROMESA; (c) Declaring that the Illegal Fiscal Plan violates Section 201(b)(1)(A)(i) of PROMESA; (d) Declaring that the Illegal Fiscal Plan and the Fiscal Plan Act violate Sections 101(a) and 201(b) of PROMESA; (e) Declaring that the Illegal Fiscal Plan and the Fiscal Plan Act violate Section 201(b)(1)(B) of PROMESA; (f) Declaring that the Illegal Fiscal Plan does not constitute a Fiscal Plan as defined in Sections 5(10) and 5(22) of PROMESA; (g) Declaring that the Illegal Fiscal Plan and the Fiscal Plan Act violate the Contracts Clause; -44-

45 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 45 of 47 Desc: Main (h) Declaring that the Illegal Fiscal Plan and the Fiscal Plan Act violate the Takings and Due Process Clauses; (i) Enjoining Defendants from presenting or proceeding with confirmation of any plan of adjustment based on the Illegal Fiscal Plan and the Fiscal Plan Act, or taking or causing to be taken any other action pursuant to the Illegal Fiscal Plan and the Fiscal Plan Act; (j) Staying the confirmation of any plan of adjustment in these Title III proceedings pending development of a fiscal plan compliant with PROMESA and the U.S. Constitution; and (k) Granting Plaintiffs such other and further relief as this Court may deem just and proper. -45-

46 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 46 of 47 Desc: Main Dated: San Juan, Puerto Rico May 3, 2017 CASELLAS ALCOVER & BURGOS P.S.C. By: /s/ Heriberto Burgos Pérez Heriberto Burgos Pérez USDC-PR Ricardo F. Casellas-Sánchez USDC-PR Diana Pérez-Seda USDC-PR P.O. Box San Juan, PR Telephone: (787) Facsimile: (787) CADWALADER, WICKERSHAM & TAFT LLP By: /s/ Howard R. Hawkins, Jr. Howard R. Hawkins, Jr. (pro hac vice admission forthcoming) Mark C. Ellenberg (pro hac vice admission forthcoming) Ellen M. Halstead (pro hac vice admission forthcoming) Thomas J. Curtin (pro hac vice admission forthcoming) Casey J. Servais (pro hac vice admission forthcoming) 200 Liberty Street New York, NY Telephone: (212) Facsimile: (212) Attorneys for Assured Guaranty Corp. and Assured Guaranty Municipal Corp. -46-

47 Case: LTS Doc#:1 Filed:05/03/17 Entered:05/11/17 15:25:55 Document Page 47 of 47 Desc: Main ADSUAR MUNIZ GOYCO SEDA & PEREZOCHOA PSC By: /s/ Eric Perez-Ochoa Eric Perez-Ochoa 208 Ponce de Leon Ave, Suite 1600 San Juan, PR Phone: (787) Facsimile: (787) WEIL, GOTSHAL & MANGES LLP By /s/ Jonathan Polkes Jonathan Polkes (pro hac vice forthcoming) Marcia Goldstein (pro hac vice forthcoming) Salvatore A. Romanello (pro hac vice forthcoming) Gregory Silbert (pro hac vice forthcoming) 767 Fifth Avenue New York, N.Y Telephone: (212) Facsimile: (212) Attorneys for National Public Finance Guarantee Corp. -47-

48 Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 1 of 39 Desc: EXHIBIT A

49 Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 2 of 39 Desc: FISCAL PLAN FOR PUERTO RICO San Juan, Puerto Rico March 13, 2017

50 Disclaimer Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 3 of 39 Desc: The Puerto Rico Fiscal Agency and Financial Advisory Authority ( AAFAF ), the Government of Puerto Rico (the Government ), and each of their respective officers, directors, employees, agents, attorneys, advisors, members, partners or affiliates (collectively, with AAFAF and the Government instrumentalities the Parties ) make no representation or warranty, express or implied, to any third party with respect to the information contained herein and all Parties expressly disclaim any such representations or warranties. The Government has had to rely upon preliminary information and unaudited financials for 2015 and 2016, in addition to the inherent complexities that are part of a government in transition, especially after a prolonged period of public finance obscurity. As such, AAFAF and the Government have made certain assumptions that may materially change once more clarity and transparency takes hold, especially after the Government issues the past due audited financials for 2015 and 2016 later this year. The Parties do not owe or accept any duty or responsibility to any reader or recipient of this presentation, whether in contract or tort, and shall not be liable for or in respect of any loss, damage (including without limitation consequential damages or lost profits) or expense of whatsoever nature of such third party that may be caused by, or alleged to be caused by, the use of this presentation or that is otherwise consequent upon the gaining of access to this document by such third party. This document does not constitute an audit conducted in accordance with generally accepted auditing standards, an examination of internal controls or other attestation or review services in accordance with standards established by the American Institute of Certified Public Accountants or any other organization. Accordingly, the Parties do not express an opinion or any other form of assurance on the financial statements or any financial or other information or the internal controls of the Governmentand the information contained herein. Any statements and assumptions contained in this document, whether forward-looking or historical, are not guarantees of future performance and involve certain risks, uncertainties, estimates and other assumptions made in this document. The economic and financial condition of the Government and its instrumentalities is affected by various financial, social, economic, environmental and political factors. These factors can be very complex, may vary from one fiscal year to the next and are frequently the result of actions taken or not taken, not only by the Government and its agencies and instrumentalities, but also by entities such as the government of the United States. Because of the uncertainty and unpredictability of these factors, their impact cannot be included in the assumptions contained in this document. Future events and actual results may differ materially from any estimates, projections, or statements contained herein. Nothing in this document should be considered as an express or implied commitment to do or take, or to refrain from taking, any action by AAFAF, the Government, or any government instrumentality in the Government or an admission of any fact or future event. Nothing in this document shall be considered a solicitation, recommendation or advice to any person to participate, pursue or support a particular course of action or transaction, to purchase or sell any security, or to make any investment decision. By receiving this document, the recipient shall be deemed to have acknowledged and agreed to the terms of these limitations. This document may contain capitalized terms that are not defined herein, or may contain terms that are discussed in other documents or that are commonly understood. You should make no assumptions about the meaning of capitalized terms that are not defined, and you should consult with advisors of AAFAF should clarification be required. 2

51 Table of Contents Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 4 of 39 Desc: I. Introduction II. Financial Projections III. Fiscal Reform Measures IV. Structural Reforms V. Debt Sustainability Analysis VI. TSA Liquidity VII. Financial Control Reform 3

52 Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 5 of 39 Desc: I. INTRODUCTION 4

53 INTRODUCTION Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 6 of 39 What the Government s Proposed Fiscal Plan Seeks to Achieve Desc: Closing the Projected Baseline Fiscal Plan Deficit At the direction of the Oversight Board, the Government s new administration has prepared this Fiscal Plan which supersedes the prior administration s December 2016 fiscal plan that was rejected by the Board. From the date the new administration took office, AAFAF and its advisors have earnestly worked in cooperation with the Board s input to put forth a credible and reliable Fiscal Plan that will guide Puerto Rico s fiscal and economic recovery The Fiscal Plan commits to fiscal responsibility and implements specific revenue enhancements and targeted expenditure reductions to return Puerto Rico to fiscal stability and economic growth. In particular, the Fiscal Plan averts the $67bn fiscal deficit from the prior administration s plan and achieves +$7.9bn in cumulative cash flow available for debt service through the 10 year period Further Improvement The Government fully appreciates that despite fiscal and economic uncertainties, now is the time to set the benchmark for the needed fiscal and economic measures as outlined in the Fiscal Plan. The Government is demonstrating its commitment to correcting the mistakes of the past. The Government is also mindful that in stopping the cycle of deficit spending, it must do so without undermining economic recovery or endangering the health, welfare or safety of the 3.5 million US citizens living in Puerto Rico Bondholder Negotiations and Consensus Per PROMESA Section 2.01(b)(1)(I), the fiscal plan must provide a debt sustainability analysis. The Government s Fiscal Plan consolidates available cash resources that can be made available for debt service payments. The Fiscal Plan as proposed does not presume cash flow for debt service for any particular bondholder constituency, including clawed back cash and special revenues, nor does it take a position with respect to asserted constitutional or contractual rights and remedies, validity of any bond structure, or the dedication or application of tax streams / available resources The Government believes that any fiscal plan should reflect commitment to develop and implement operational and structural improvements that demonstrate the Government s willingness to achieve maximum payment of its debt obligations as restructured. However, in achieving debt sustainability, Puerto Rico s bondholders will be called upon to share in the sacrifice needed for a feasible debt restructuring. The Government believes communication, grounded in fiscal responsibility, can create the opportunity for maximum consensus among stakeholders and pave the way for Puerto Rico s long-term fiscal stability and economic growth 5

54 INTRODUCTION Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 7 of 39 What the Fiscal Plan does not determine Desc: Major Entities Impacted by the Fiscal Plan The Fiscal Plan is for the Government as a covered entity under PROMESA. The Government's various taxes, fees and other revenues are used to fund, subsidize or guarantee payments of the debt of many covered entities by various means. Accordingly, this Fiscal Plan does provide for payment of expenses and capital investments in, among other covered entities: (1) Public Building Authority, (2) PR Sales Tax Financing Corporation ( COFINA ), (3) PR Highways and Transportation Authority ( HTA ), (4) PR Convention Center District Authority ( PRCCDA ), (5) PR Infrastructure Finance Authority ( PRIFA ), (6) Employees' Retirement System ( ERS ), (7) University of Puerto Rico ( UPR ), (8) Puerto Rico Industrial Development Company ( PRIDCO ), and (9) Government Development Bank ( GDB ) Major Entities Not Covered by the Fiscal Plan There are four entities whose revenues and expenses are not included in this Fiscal Plan: (1) Puerto Rico Electric Power Authority ( PREPA ), (2) Puerto Rico Aqueduct and Sewer Authority ( PRASA ), (3) The Children's Trust Fund and (4) Puerto Rico Housing Finance Authority ( PRHFA ). As a result, this Fiscal Plan does not take a position with respect to these entities financial prospects or the debt sustainability of such entities Legal & contractual issues not determined by the Fiscal Plan The Fiscal Plan does not attempt to resolve, among others, the following issues: The mechanisms by which projected cash flow available for debt service should be allocated to different debt instruments What is an essential service for purposes of the exercise of the Government's police power The scope, timing or specific use of revenues to be frozen or redirected as 'claw back' revenue The value, validity and /or perfection of pledges Whether any particular bond or debt issuance may have been improvidently issued What the Government is permitted to accomplish through the increase or decrease of dedicated taxes, fees, tolls or other revenue sources 6

55 Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 8 of 39 Desc: II. FINANCIAL PROJECTIONS 7

56 FINANCIAL PROJECTIONS Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 9 of 39 The Government will undertake fiscal measures that will reduce the fiscal gap by $39.6B, and create a 10 year cash flow surplus of $7.9B Based on the currently stated debt obligations, the 10-year budget gap is expected to reach $66.9B ~$35.1B of expected principal and interest payments during the forecast period Desc: The Fiscal Plan estimates cash flows available for debt service. The chart below shows the key components of the forecast, including: Base fiscal gap of $66.8B which includes full cost of debt service and does not include the impact of revenue and expense measures Revenue and expense measures of $13.9B and $25.7B 1 Revenue Measures: stabilizing corporate tax revenue through tax reform positively affects cash flows by $7.9B Expense Measures: $19.2B of $25.7B (79%) due to Government right-sizing initiatives 2 ($MM) Accumulated ACA funding loss of $16.1B +39,580 7,873 25,683 13,897 35,129-31,708-66,836 Base Financial Cash Flows Debt Service 3 Cash Flow pre-measures Revenue Measures Expense Measures Cash Flows Post Measures Excluding Debt Service 1 See Section IV, Fiscal Reform Measures for full detail 2 See government right-sizing section 3 Includes $1,415 of past due P&I (Aug 1, 2015 to July 1, 2016), and $277 in Other Adjustments. 8

57 FINANCIAL PROJECTIONS Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 10 of 39 The current fiscal plan is a significant departure from the version presented in October, as it commits to higher revenue and expense measures of $4.4B and $16.4 B, respectively The October proposed Fiscal Plan estimated negative cumulative cash flows pre-debt service over the projection period ( 17-26) of ($4.9B) vs. the Current Fiscal Plan projections estimating positive cumulative cash flows pre-debt service of $7.92B. The change is comprised primarily of: Negative net impact on cash flows available for debt service, pre-measures of -$8.0B Decrease in total revenues of $1.7B Decreased expenses of $6.3B Enhanced revenue measures of $4.4B Additional savings from Expense Measures of $16.4B Desc: ($MM) 7,873 16,427-4,947 1,658 6,301 4,352 October Fiscal Plan cum. Cash Flows pre Debt Service Changes to Revenue Baseline Changes to Expenses Baseline Revenue Measures Expense Measures Cash Flows Post Measures Excluding Debt Service 9

58 FINANCIAL PROJECTIONS Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 11 of 39 Desc: A summary of financials for the 10-year projection period shows positive cash flows postmeasures, before debt service of $7.9B ($MM) Fiscal year ending June 30 ($ in millions) '17 - '26 total PR Nominal GNP Growth (2.2%) (2.8%) (2.4%) (0.5%) (0.4%) 0.3% 1.0% 1.6% 2.1% 2.6% Measures 1 Revenues before Measures $18,952 $17,511 $16,407 $16,434 $16,494 $16,590 $16,746 $16,953 $17,204 $17,509 $170,799 Noninterest Exp. before Measures 1 ($17,872) ($18,981) ($19,233) ($19,512) ($19,950) ($20,477) ($20,884) ($21,310) ($21,973) ($22,316) ($202,507) Cash flows pre-measures $1,080 ($1,470) ($2,826) ($3,077) ($3,456) ($3,886) ($4,139) ($4,357) ($4,769) ($4,807) ($31,708) Revenue measures ,381 1,384 1,531 1,633 1,740 1,752 1,766 1,785 13,897.1 Expense measures ,012 2,415 2,983 3,156 3,255 3,357 3,724 3,830 25,683.3 Net impact of measures -- 1,875 3,393 3,799 4,515 4,789 4,995 5,108 5,491 5,615 39,580 Cash flows post-measures, before Debt Service $1,080 $404 $567 $722 $1,059 $903 $857 $751 $722 $808 $7,873 Cash flows post-measures, before debt service trends: FY 2017 estimate of $1.1B, declining to a low of $0.4B in FY 2018, driven by GNP contraction and ERS Paygo contributions of $1.0B in FY 2018 Forecast peaks at $1.1B in FY 2021 before declining to $0.8B by FY Decline is primarily driven by Affordable Care Act ( ACA ) funding expiration that increase steadily from ~$0.9B in FY 2018 to ~$2.4B in FY 2026 Expense measures include $1.3B in supplier payment pay downs through the projection period 1 Full details in Appendix 2 This addback is illustrative, and is not reflected in the amounts available for debt service elswhere in this Plan 10

59 FINANCIAL PROJECTIONS Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 12 of 39 Revenues BeforeMeasures Desc: ($MM) Fiscal year ending June 30 ($ in millions) '17 - '26 total PR Nominal GNP Growth (2.2%) (2.8%) (2.4%) (0.5%) (0.4%) 0.3% 1.0% 1.6% 2.1% 2.6% Revenues General Fund Revenues: Individual Income Taxes $1,892 $1,760 $1,718 $1,709 $1,703 $1,708 $1,725 $1,752 $1,789 $1,836 $17,592 Corporate Income Taxes 1,515 1,473 1,437 1,430 1,424 1,429 1,443 1,466 1,497 1,536 14,649 Non-Resident Withholdings ,624 Alcoholic Beverages ,591 Cigarettes ,083 Motor Vehicles ,191 Excises on Off-Shore Shipment Rum ,816 Other General Fund Revenue ,833 Total 5,399 5,148 5,030 5,007 4,989 5,005 5,055 5,134 5,239 5,372 51,378 General Fund Portion of SUT (10.5%) 1,718 1,655 1,596 1,553 1,511 1,484 1,472 1,474 1,487 1,512 15,463 Net Act 154 2,075 1,556 1,038 1,038 1,038 1,038 1,038 1,038 1,038 1,038 11,931 General Fund Revenue $9,192 $8,360 $7,664 $7,598 $7,538 $7,527 $7,565 $7,646 $7,764 $7,921 $78,773 Additional SUT (COFINA, FAM & Cine) ,003 1,039 1,078 1,118 1,161 9,936 Other Tax Revenues 1,337 1,396 1,401 1,411 1,423 1,429 1,436 1,445 1,455 1,467 14,199 Other Non-Tax Revenues ,174 Adj. Revenue before Measures $11,958 $11,208 $10,552 $10,539 $10,550 $10,588 $10,675 $10,810 $10,986 $11,215 $109,082 Federal Transfers 6,994 7,168 7,372 7,477 7,623 7,835 8,023 8,212 8,469 8,675 77,847 Loss of Affordable Care Act ("ACA") Funding -- (865) (1,516) (1,582) (1,680) (1,833) (1,953) (2,069) (2,251) (2,382) (16,130) Revenues before Measures $18,952 $17,511 $16,407 $16,434 $16,494 $16,590 $16,746 $16,953 $17,204 $17,509 $170,799 11

60 FINANCIAL PROJECTIONS Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 13 of 39 Non-Interest Expenses BeforeMeasures Desc: ($MM) Fiscal year ending June 30 ($ in millions) '17 - '26 total Expenses General Fund Expenditures: Direct Payroll ($3,271) ($3,309) ($3,342) ($3,375) ($3,413) ($3,458) ($3,509) ($3,563) ($3,619) ($3,675) ($34,532) Direct Operational Expenses (907) (918) (926) (936) (946) (959) (973) (988) (1,003) (1,019) (9,574) Utilities (260) (332) (352) (360) (373) (372) (369) (374) (387) (395) (3,575) Special Appropriations (3,890) (4,037) (4,068) (4,068) (4,209) (4,140) (4,143) (4,136) (4,250) (4,147) (41,087) General Fund Expenses (8,329) (8,596) (8,688) (8,738) (8,941) (8,929) (8,993) (9,060) (9,259) (9,236) (88,768) Other: Paygo Contributions in Excess of Asset Balance -- (989) (1,014) (985) (964) (1,151) (1,177) (1,217) (1,251) (1,278) (10,026) Run-Rate Capital Expenditures (283) (400) (407) (415) (422) (429) (437) (445) (453) (462) (4,154) Total other (283) (1,389) (1,421) (1,400) (1,386) (1,581) (1,614) (1,662) (1,704) (1,739) (14,180) Component Units, Non-GF Funds and Ent. Funds: Net Deficit of Special Revenue Funds (110) (130) (146) (154) (162) (169) (173) (176) (176) (174) (1,571) Independently Forecasted Non-Enterprise CUs (452) (380) (433) (558) (639) (752) (859) (963) (1,109) (1,210) (7,356) HTA Operational Expenses (246) (234) (236) (238) (239) (243) (246) (250) (254) (258) (2,444) Other (44) (41) (30) (30) (30) (31) (31) (32) (32) (33) (335) Total (853) (785) (845) (980) (1,071) (1,194) (1,310) (1,420) (1,572) (1,675) (11,705) Disbur. of Tax Revenues to Entities Outside Plan (335) (302) (304) (307) (313) (314) (316) (319) (322) (334) (3,168) Adj. Expenses before Measures ($9,800) ($11,071) ($11,259) ($11,425) ($11,712) ($12,018) ($12,234) ($12,461) ($12,857) ($12,984) ($117,822) Federal Programs (6,994) (7,168) (7,372) (7,477) (7,623) (7,835) (8,023) (8,212) (8,469) (8,675) (77,847) Reconciliation Adjustment (585) (592) (598) (604) (610) (618) (627) (637) (647) (657) (6,175) Other non-recurring (493) (150) (5) (5) (5) (5) (663) Total (8,072) (7,910) (7,975) (8,086) (8,238) (8,458) (8,650) (8,849) (9,116) (9,332) (84,685) Noninterest Exp. before Measures ($17,872) ($18,981) ($19,233) ($19,512) ($19,950) ($20,477) ($20,884) ($21,310) ($21,973) ($22,316) ($202,507) 12

61 FINANCIAL PROJECTIONS Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 14 of 39 Desc: Assumptions and Methodology: Revenue Category Description 17 Revenue $MM 26 Revenue $MM Growth Methodology 1 Taxes Individual Income Taxes Corporate Income Taxes 3,407 3,371 Grows with PR Nominal GNP Growth Factor Excludes corporate tax reform and compliance impact which is included within fiscal measure reform analyses 2 Other General Fund Revenue General Fund Grows with PR Nominal GNP Growth Factor 3 Act 154 Act 154 Act 154 / Foreign Company Tax Losses 2,075 1,038 Act 154 revenue is sustained at 2017 levels until 2026 Losses equal (519) in 2018, double in 2019, and sustained at 2019 levels 4 SUT General Fund Portion of SUT (10.5%) Additional SUT (COFINA, FAM, & Cine) 2,568 2,673 Total SUT grown at PR Nominal GNP growth Allocation proportions grow at historical levels 5 ACA Loss Loss of Affordable Care Act ( ACA ) Funding 0-2,382 Initial decrease from (865) in 2018 to (1,516) in 2019 Annual growth in loss of 6.7% from 2019 to Component Units Other Tax Revenues Other Non-Tax Revenues 1,916 2,132 Grows with PR Nominal GNP Growth Factor & Elasticity 13

62 FINANCIAL PROJECTIONS Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 15 of 39 Assumptions and Methodology: Expenses (1/2) Desc: Category Description 2017 $MM 2026 $MM Growth Methodology 1 Direct Payroll Payroll and Operational Expenses Education Payroll Police Payroll -3,271-3,675 Growth based on previous year multiplied by PR Inflation and Inflation pass-through to payroll 2 Direct Operational Expenses Legislature Department of Education Other Agencies ,019 Growth based on previous year multiplied by PR Inflation and Inflation pass-through to payroll 3 Utilities Power and Water PBA Operating Subsidy (Rent) Insurance Premiums PBA Operating Subsidy maintains Power and water have initial increase due to subsidy reduction with steady year-over-year growth until Special Appropriations UPR Judicial and Municipalities Retirement Systems Health Insurance -3,890-4,147 UPR, Judicial and Municipalities increase in 2018, maintain steady-state following initial growth 5 Paygo Contributions in Excess of Asset Balance Required Pay-go contribution: ERS, TRS and JRS 0-1,278 Paygo program for ERS, TRS and JRS is initiated in 2018 with initial expenses of $989MM Steady growth in expenses starting in Run-Rate Capital Expenditures Non-Growth Capital Expenditures in the Base (Run-Rate) Growth Capex Initial increase in 2018 to $400MM and steady growth in following years based on previous year multiplied by PR Inflation following 14

63 FINANCIAL PROJECTIONS Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 16 of 39 Assumptions and Methodology: Expenses (2/2) Desc: Category Description 2017 $MM 2026 $MM Growth Methodology 7 Reconciliation Adjustment Reconciliation Adjustment Initial increase in 2018 to $592MM with steady increase until 2026 Reconciliation adjustment based on midrange estimate provided by E&Y analysis and audit 8 Other Non- Recurring Payment of Past-Due Tax Refunds Transition and restructuring costs Initial decline in tax refunds in 2018 from $493MM to $150MM, decline in 2019 from $150MM to $5MM, and elimination of non-recurring expenses in 2023 Costs to implement restructuring ($370MM over 10 years) 9 Component Units Net Deficit of Special Revenue Funds Independently forecasted nonenterprise HTA Operational Expenses ,675 Net Deficit of Special Revenue Funds growth is based on previous year multiplied by PR Inflation Non-enterprise expenses include ASEM, ASES, ADEA, PRCCDA, PRIDCO, PRITA, Tourism, and UPR deficits PBA and the Port Authority run a surplus in 2017 that transitions towards deficit beginning in 2018 Initial HTA decline in expenses due to a reduction in Past Due AP costs 15

64 FINANCIAL PROJECTIONS Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 17 of 39 Assumptions and Methodology: Macroeconomic Factors Desc: Category Description, % Growth Methodology 1 PR Nominal GNP Growth Factor Initial decrease to 97.2% in 2019 Increase in 2020 to 99.5% Steady, minimal growth until PR Inflation Initial negative inflation of -0.2% in 2017 increasing to 1.2% in 2018, 1.0% in 2019 with steady, minimal growth in Inflation until PR Population Growth Factor Maintenance of 2017 PR Population Growth Factor of 99.8% 4 US Population Growth Maintenance of 2017 US Population Growth of 100.8% until 2024, where it drops to 100.7%

65 Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 18 of 39 Desc: III. FISCAL REFORM MEASURES 17

66 FISCAL REFORM MEASURES Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 19 of 39 Fiscal Reform measures reduce the 10-year financing gap by $39.6B Desc: Estimated Impact, $MM year Total A Revenue Enhancement 924 1,381 1,384 1,531 1,633 1,740 1,752 1,766 1,785 13,897 B Government Right-sizing 851 1,713 2,094 2,414 2,543 2,597 2,651 2,706 2,758 20,329 C Reducing Healthcare Spending ,001 6,123 D Pension Reform TOTAL 1,875 3,393 4,061 4,777 5,051 5,257 5,370 5,491 5,615 Excludes $1,310MM in supplier pay downs 40,890 Note: Values may not add up due to rounding; Excludes expenditures related to rehabilitation of trade terms with local suppliers 18

67 REVENUE ENHANCEMENT Revenue Enhancement Measures, $MM Adjust Taxes and Fees Tax Compliance Corporate Tax Reform Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 20 of Desc: Hacienda will embark in a multi-year transformation process to reduce leakage, improve revenue collections and adjust fees 1,633 1,740 1,752 1,766 1,785 1,381 1,384 1, ,038 1,038 1,038 1, Reform Measures Corporate Tax Reform Description The Government will use the breathing room provided by the extension of Act 154 to seek a more stable, consistent corporate tax policy that implements a broad-based regime with fewer exemptions by no later than January Impact $519MM Tax Compliance Reduce leakage by increasing electronic SUT tax collections at the point of sale, including internet sales Improve revenue collections by using advanced analytics, expanding capacity and conducting targeted interventions $150MM Adjust Taxes and Fees Increase tobacco-related products excise tax and implement new property tax regime Revise fees including licenses, traffic fines, insurance fees and other charges for services to keep up with market trends $255MM Note: To meet fiscal plan objectives, the Government may consider additional measures. 19

68 GOVERNMENT RIGHT-SIZING The Government must embark on a transformative journey in order to provide core services to citizens in an efficient and fiscally responsible manner Government Right-Sizing Measures 1, $MM Personnel Related Non-Personnel Related Reduction of Subsidies Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 21 of , , ,414 2,543 2,597 2,651 2,706 2, Desc: 1, , Reform Measures Personnel Related Description Freeze on payroll increases for fiscal years 2018 to 2020 Improve employee mobilization across government, uniform fringe benefits and eliminate vacation and sick day liquidations to produce higher attrition rates or other payroll-related savings 2018 Impact $250MM Non-Personnel Related Freeze on operational cost increases for fiscal years 2018 to 2020 Re-design the way the Government works by reducing non-core expenses, externalizing services to private entities, centralizing services to eliminate duplication, achieve procurement savings or other cost-cutting measures $190MM Reduction of Subsidies Gradually reduce general fund subsidies to the University of Puerto Rico, municipalities and other direct subsidies to the private sector Proactively engage with the University of Puerto Rico, municipalities, as well as industry partners, to mitigate the economic development impact of subsidy removal $411MM Note: To meet fiscal plan objectives, the Government may consider additional measures. 1) Post 2018, the relative distribution of savings between personnel and non-personnel related expenses will be decided as part of updates to the Fiscal Plan and the annual budget 20

69 REDUCING HEALTHCARE SPENDING The Government will focus on improving efficiencies, adjusting benefits and developing a new healthcare model in order to achieve savings in healthcare spend Reducing Healthcare Spending Measures, $MM Modify Benefits Package Reduce Drug Cost Improve Payment Integrity Pay for Value New Healthcare Model Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 22 of Desc: ,001 1, Reform Measures Pay for Value Description Establish uniformed fee schedules and limit reimbursement rates for providers Replace current profit sharing arrangement with MCOs and replace with a Medical Loss Ratio 2018 Impact $38MM Improve Payment Integrity Reduce Drug Cost Establish partnerships to increase the scrutiny of premium payments for beneficiaries that have left the system or have another health insurance plan Establish Medicaid Fraud Control Unit and implement the Medicaid Management Information System to reduce waste, fraud and abuse Reduce outpatient drug spending by increase pharmacy discounts on branded drugs, enforce mandatory dispensing of generic drugs, updating the preferred formulary and establishing shared-savings initiatives $25MM $38MM Modify Benefits Package Evaluate services that could be capped and/or eliminated from the current benefit package without adversely affecting access for Mi Salud beneficiaries $0 New Healthcare Model Develop a new healthcare model in which the Government pays for basic, less costly benefits and the patient pays for premium services selected resulting in cost reductions attributed to greater competition along with the capped PMPM amount $0 Note: To meet fiscal plan objectives, the Government may consider additional measures. 21

70 PENSION REFORM Segmentation of the defined contribution structure will protect the retirement savings of government employees Pension Reform Measures, $MM Changes to Special Laws Changes to Pension Benefits Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 23 of Desc: Reform Measures Contribution Segregation and New Benefit Plans Initiative Switch to pay-as-you-go model, segregate prospective employee contributions, facilitate Social Security enrollment and improve investment alternatives 2018 Impact $0 Adjust Retirement Benefits Protect benefits for lowest pension income earners. Progressive strategy to reduce retirement benefit costs including other post-employment benefits. $0 Note: To meet fiscal plan objectives, the Government may consider additional measures. 22

71 Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 24 of 39 Desc: IV. STRUCTURAL REFORMS 23

72 STRUCTURAL REFORM MEASURES Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 25 of 39 Implementing the package of structural reforms will provide a cumulative 2.0% increase in GNP growth Desc: 1 Improve Ease of Business Activity 2 Improve Capital Efficiency 3 Energy Reform 1a Increase Labor Participation Institute public policy measures aimed to attract new businesses, create new employment opportunities, and foster private sector employment growth to increase labor demand Change welfare and labor incentives to encourage greater sector participation thus increasing labor supply 1b Permitting Process Reform Centralize, streamline, and modernize and expedite permitting processes; increase business friendly environmental and economic growth 1c Tax Reform Lower marginal tax rates and broaden the tax base; simplify and optimize the existing tax code to achieve gains in efficiency, ease of doing business and reducing tax evasion 1d Regulatory Reform Reduce unnecessary regulatory burdens to reduce the drag of government on the private sector 2a 2b 2c Infrastructure Reform Augmenting competitiveness by investing in critical infrastructure and quality of public services in roads, ports, telecommunications, water and waste, knowledge services, and other strategically important sectors Public-Private Partnerships Leverage key public assets through long term concessions to optimize quality of public infrastructure, services to public and sustainable operations and maintenance Critical Projects Implement management system to boost development of critical projects through expedited processes 3a Energy Reform Leverage and facilitate expedited private sector investments in modern, costefficient, and environmentally compliant energy infrastructure; reform PREPA operations and services to clients; and allow for greater competition in energy generation 4 4a Promoting Economic Development Enterprise Puerto Rico Promote productivity growth, attract FDI & incentivize investments in technology through collaboration with the private sector 4b Destination Marketing Organization Externalize the overseeing of marketing efforts & continuity under a single brand and as a unified front representing all of Puerto Rico s tourism components 24

73 INFRASTRUCTURE / P3 REFORM P3 Program Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 26 of 39 The initial stage of the P3 program includes launching of ~$5B of projects during the calendar years that have been identified and are in project preparation Desc: P3 Project Identification Identified initial list of priority projects with P3 potential Assessed project business cases and impacts on priority infrastructure needs, the economy, and efficient delivery of public services Split into 3 groups based on projected sequencing, designed to launch in 2017, 2018 and 2019 Key Considerations in the Overall P3 Implementation P3 Key Target Areas % Project sequencing is designed to effectively progress the advancement of Water Other projects and avoid major obstacles in the shortest timeline possible (i.e., 8 0 progression from easily executable/advanced permitting to more difficult/less Waste mgmt advanced projects) 20 Need to promote and improve funding models to use private funds, where relevant, as leverage to maximize the unused federal funds current available Social infra Year Impact Transport à Capital Improvement Investment: ~$5B Jobs Created: ~100, Energy Q-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Group 1 Projects Launch Group 1 Projects Estimated value ~$1B Group 2 Projects Invest in preparing Group 2 Data gathering, due diligence, etc. Launch Group 2 Projects Estimated value ~$2B Group 3 Projects Invest heavily in preparing Group 3 Data gathering, due diligence, etc. Launch Group 3 Projects Estimated value $2B (Project timeline includes P3 concessions included in Externalization measures) 25

74 Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 27 of 39 Desc: V. DEBT SUSTAINABILITY ANALYSIS 26

75 DEBT SUBSTAINABILITY Debt summary Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 28 of 39 Desc: Below is a summary of the debt (excluding pension liabilities) considered in the fiscal plan Note: Amounts are estimated as of February 2017 and based upon preliminary unaudited numbers provided to AAFAF by issuer agencies and from publicly available information. On behalf of the Board, Ernst & Young is conducting an assessment of the debt outstanding to confirm these figures. Estimated amounts are subject to further review and may change Summary of debt outstanding as of February 2017 ($MM) Unpaid Total Bonds & Loans from Total Debt DSRF Issuers included in Fiscal Plan Bond principal CAB P&I 1 Private Loans Private loans GDB/MFA Entities Service FY Balance GO $12,013 $84 $1,146 $24 $13,267 $169 $3, COFINA 11,425 6, , , HTA 2 3, ,124 1, PBA 3, , GDB 3, 4 3, , , ERS 2, , PRIFA 5 1, , PFC 1, , UPR PRCCDA PRIDCO AMA Other Central Gov't Entities , Total $41,056 $7,293 $2,444 $668 $51,461 $6,409 $10,558 $242 Debt Issuers not incl. in Fiscal Plan PREPA 8, , ,775 6 PRASA 7 3, , Children's Trust , HFA PRIICO Municipality Related Debt ,140 1,696 2,036 n.a. 59 Total $14,147 $641 $13 $2,520 $17,320 $2,386 $4,044 $276 Total $55,203 $7,933 $2,457 $3,188 $68,781 $8,795 $14,602 $518 Less: GDB Bonds (excl. TDF) (3,766) Plus: Loans from GDB/MFA Entities 8,795 Public Sector Debt $73,810 Notes: 1) Unpaid principal and interest includes debt service that has been paid by insurers and is owed by the government 2) HTA includes Teodoro Moscoso bonds 3) GDB private loans includes Tourism Development Fund ("TDF") guarantees 4) Includes GDB Senior Guaranteed Notes Series 2013-B1 ("CFSE") 5) PRIFA includes PRIFA Rum bonds, PRIFA Petroleum Products Excise Tax BANs, PRIFA Port Authority bonds and $34.9m of PRIFA ASSMCA bonds 6) UPR includes $64.2m of AFICA Desarrollos Universitarios University Plaza Project bonds 7) PRASA bonds includes Revenue Bonds, Rural Development Bonds, Guaranteed 2008 Ref Bonds 8) Municipality Related Debt includes AFICA Guyanabo Municipal Government Center and Guaynabo Warehouse for Emergencies bonds 27

76 DEBT SUBSTAINABILITY Debt Service Schedule Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 29 of 39 Desc: The table below summarizes the annual debt service through FY 2026 for all issuers included in the fiscal plan FY 2017 FY 2026 debt service ($MM) Fiscal year ending June 30, Cash Interest GO $733 $714 $699 $680 $658 $641 $621 $597 $571 $545 PBA COFINA HTA PRIFA PRCCDA PFC UPR ERS GDB PRIDCO Total $2,333 $2,279 $2,229 $2,161 $2,109 $2,054 $1,999 $1,916 $1,857 $1,790 Principal GO $395 $351 $392 $439 $334 $358 $378 $402 $428 $454 PBA COFINA HTA PRIFA PRCCDA PFC UPR ERS (0) GDB PRIDCO Total $1,124 $979 $1,614 $1,296 $1,299 $1,097 $1,091 $1,590 $1,149 $1,470 Total debt service GO $1,128 $1,066 $1,090 $1,118 $991 $999 $999 $999 $999 $999 PBA COFINA HTA PRIFA PRCCDA PFC UPR ERS GDB PRIDCO Total $3,457 $3,257 $3,843 $3,457 $3,408 $3,152 $3,090 $3,506 $3,006 $3,261 1 HTA includes Teodoro Moscoso Bridge 2 PRIFA includes PRIFA BANs 3 UPR includes AFICA UPP 28

77 DEBT SUBSTAINABILITY Debt sustainability Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 30 of 39 Desc: The table below summarizes the annual cash flow available for debt service, and calculates implied debt capacity based on a range of interest rates and coverage ratios assuming an illustrative 35 year term Cash flow available for debt service incorporates (i) the payment of essential services, (ii) benefit of clawback revenues and (iii) a prudent contingency reserve In the Fiscal Plan summarized below, the cash flow after Measures but before Debt Service averages $787m per year during the period Debt sustainability sensitivity analysis ($MM) Fiscal year ending June 30 ($ in millions) '17 - '26 total Baseline Projections Revenues $18,952 $17,511 $16,407 $16,434 $16,494 $16,590 $16,746 $16,953 $17,204 $17,509 $170,799 Expenses (17,872) (18,981) (19,233) (19,512) (19,950) (20,477) (20,884) (21,310) (21,973) (22,316) (202,507) Cash Flow Excl. Debt Service & Measures 1,080 (1,470) (2,826) (3,077) (3,456) (3,886) (4,139) (4,357) (4,769) (4,808) (31,708) Impact of Measures Revenue Measures ,381 1,384 1,531 1,633 1,740 1,752 1,766 1,785 13,897 Expense Measures ,012 2,415 2,983 3,156 3,255 3,357 3,724 3,830 25,683 Total Measures -- 1,875 3,393 3,799 4,515 4,789 4,995 5,108 5,491 5,615 39,580 Cash Flow Available for Debt Service $1,080 $404 $567 $722 $1,059 $903 $857 $751 $722 $808 $7,873 Illustrative Sustainable Debt Capacity Sizing Analysis Sensitivity Analysis: Implied Debt Capacity at 10% Contingency Illustrative Cash Flow Available $700 $750 $800 $850 $900 $950 $1,000 $1,050 $1, % 12,600 13,500 14,400 15,301 16,201 17,101 18,001 18,901 19,801 Sensitivity Analysis: PV Rate % 4.0% 11,759 12,599 13,439 14,278 15,118 15,958 16,798 17,638 18, % 11,000 11,786 12,572 13,358 14,143 14,929 15,715 16,501 17,286 Sensitivity Analysis: Implied Debt Capacity at 4% PV Rate Illustrative Cash Flow Available $700 $750 $800 $850 $900 $950 $1,000 $1,050 $1, % 12,412 13,299 14,185 15,072 15,958 16,845 17,731 18,618 19,505 Sensitivity Analysis: % Contingency 10.0% 11,759 12,599 13,439 14,278 15,118 15,958 16,798 17,638 18, % 11,105 11,899 12,692 13,485 14,278 15,072 15,865 16,658 17,451 29

78 Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 31 of 39 Desc: VI. TSA LIQUIDITY 30

79 TSA LIQUIDITY Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 32 of 39 Weekly cash flow forecast through 2017FY Desc: Cash Flows Before Cliffs, Measures and Debt Fcst - 1 Fcst - 2 Fcst - 3 Fcst - 4 Fcst - 5 Fcst - 6 Fcst - 7 Fcst - 8 Fcst - 9 Fcst - 10 Fcst - 11 Fcst - 12 Fcst - 13 Fcst - 14 Fcst - 15 Fcst - 16 (figures in $mm) 3/17 3/24 3/31 4/7 4/14 4/21 4/28 5/5 5/12 5/19 5/26 6/2 6/9 6/16 6/23 6/30 1 General Collections $349 $254 $58 $71 $66 $760 $186 $63 $66 $334 $60 $44 $59 $134 $520 $57 2 Sales and Use Tax Excise Tax through Banco Popular Rum Tax Electronic Lottery Subtotal $432 $277 $204 $76 $161 $784 $349 $68 $84 $424 $227 $48 $64 $210 $570 $265 7 Employee/Judiciary Retirement Admin Teachers Retirement System 70 9 Retirement System Transfers $127 $56 $56 10 Federal Funds Other Inflows Tax Revenue Anticipation Notes 13 Total Inflows $534 $388 $298 $199 $382 $912 $483 $163 $267 $517 $350 $108 $163 $373 $677 $ Payroll and Related Costs (18) (51) (120) (23) (95) (62) (101) (35) (90) (65) (96) (18) (22) (95) (56) (106) 15 Pension Benefits (87) (82) (87) (82) (87) (82) (87) 16 Health Insurance Administration - ASES (53) (53) (55) (53) (53) (53) (60) (53) (53) (53) (53) (7) (53) (53) (53) (55) 17 University of Puerto Rico - UPR (18) (18) (24) (18) (18) (18) (24) (18) (18) (18) (18) (6) (36) (18) (24) 18 Muni. Revenue Collection Center - CRIM (21) (8) (8) (8) (8) (8) (8) (8) (8) (8) (8) (15) (8) (26) 19 Highway Transportation Authority - HTA (16) (16) (19) (19) (19) (19) 20 Public Building Authority - PBA / AEP (9) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) 21 Other Governmental Entities (20) (9) (54) 25 (20) (9) (54) 25 (20) (9) (12) (18) (3) (20) (9) (63) 22 Subtotal - Government Entity Transfers ($120) ($92) ($160) ($57) ($103) ($92) ($165) ($57) ($122) ($92) ($90) ($54) ($59) ($128) ($111) ($191) 23 Supplier Payments (57) (57) (58) (86) (86) (86) (87) (68) (68) (68) (68) (53) (65) (65) (65) (66) 24 Other Legislative Appropriations (24) (14) (5) (2) (38) (5) (6) (22) (10) (5) (4) (16) (22) (5) 25 Tax Refunds (12) (13) (4) (1) (6) (39) (4) (7) (4) (4) (31) (3) (1) (4) (6) (41) 26 Nutrition Assistance Program (30) (70) (22) (35) (40) (54) (36) (22) (43) (56) (36) (16) (37) (30) (70) (20) 27 Other Disbursements (4) (4) 28 Contingency (16) (16) (16) (29) (29) (29) (29) (29) (29) (29) (29) (23) (23) (23) (23) (23) 29 Tax Revenue Anticipation Notes (152) (137) (135) 30 Total Outflows ($277) ($313) ($472) ($233) ($440) ($399) ($665) ($223) ($459) ($324) ($442) ($312) ($208) ($443) ($353) ($676) 31 Net Cash Flows Excluding Debt Service, Fiscal Cliffs and Measures $257 $75 ($174) ($34) ($58) $513 ($182) ($60) ($193) $194 ($92) ($204) ($44) ($70) $324 ($279) 32 Bank Cash Position, Beginning (a) $319 $576 $650 $477 $442 $384 $897 $716 $655 $462 $656 $564 $360 $316 $246 $ Bank Cash Position, Ending (a) $576 $650 $477 $442 $384 $897 $716 $655 $462 $656 $564 $360 $316 $246 $570 $291 (a) Excludes clawback account. 31

80 TSA LIQUIDITY Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit A Illegal Fiscal Plan Page 33 of 39 Liquidity Principles for FY 2018 No external short-term financing Rollout of Disbursement Authorization Group in order to enforce priority of payments through defined critical services (see Section VII) Consolidate dispersed treasury functions and put in place oversight over accounts not centrally managed Refine and regularly update 13 week cash analysis with detailed forecasting of cash receipts and disbursements Provide detailed daily performance projections, results, and variances 1 Cash management authority is granted to AAFAF under Act and other relevant legislation 32

81 Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Exhibit Exhibit A Illegal Fiscal Plan Page 34 of 39 Desc: VII. FINANCIAL CONTROL REFORM 33

82 FINANCIAL CONTROLS Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit A Illegal Fiscal Plan Page 35 of 39 Current state of financial controls Cash is not centrally managed No central office has visibility across all spending Procurement agencies do not actively enforce terms and specifications Limited coordinated effort to eliminate major cash outlays Limitedsweep of cash into general fund accounts Cash disbursements is a manual and subjective process handled at Hacienda No formal structure for reporting and release of audited financials Target is to improve level of detail on forecasting and specificity around assumptions Top-down approach, based onprior year s Budget Bank-to-book reconciliations are not often prepared in a timely manner No tracking mechanisms exist to measure intra-year actual expenditures vs. budget on an accrual basis 34

83 FINANCIAL CONTROLS Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit A Illegal Fiscal Plan Page 36 of 39 Budget certification per PROMESA 202 3/13: Certification of Fiscal Plan 6/30: Last day for budget certification per PROMESA 202(e) 7/1: Beginning of FY2018 March April May June July 3/17: Set timeline for budget certification per PROMESA 202 (a) Work with Oversight Board in designing a reporting structure and reporting forms 4/14: Adopt procedures to deliver timely statements and to make public per PROMESA 202(a) 4/28: Submit budget and implementation plan to Oversight Board 5/22: Submit revised budgets and supporting documents to Board, if necessary 6/5: Budget certification 35

84 FINANCIAL CONTROLS Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit A Illegal Fiscal Plan Page 37 of 39 Quarterly budget compliance process per PROMESA 203 Quarterly Action PROMESA section Description Proposed dates (mm/dd/yy) Reporting (a) Governor to submit a report describing: (1) the actual cash revenues, expenditures, and flows and (2) any other information requested by the Board Q1: 10/15/17 1 Q2: 1/16/18 Q3: 4/16/18 Q4: 7/16/18 External auditing 203 (b) Oversight Board to communicate the result of external auditing report to the government and identify any inconsistencies with the projected revenues, expenditures, or cash flows set forth in the certified Budget for such quarter Q1: 11/10/17 Q2: 2/12/18 Q3: 5/10/18 Q4: 8/10/18 Correction of variance 203 (b) Government to provide additional information regarding any inconsistencies with the certified budget and implement remedial action to correct variances Q1: 11/20/17 Q2: 2/20/18 Q3: 5/21/18 Q4: 8/20/18 Certification of variance / or Budget reductions by Board 203 (c) and (d) Board to certify that the government is at variance with the applicable certified Budget, and that the Government has initiated such measures as the Board considers sufficient to correct it If the variances are not corrected, the Board shall make appropriate reductions in nondebt expenditures and may institute automatic hiring freezes in instrumentalities and prohibit them from entering in any contract in excess of $100,000 Q1: 12/11/17 Q2: 3/12/18 Q3: 6/11/18 Q4: 9/10/18 Termination of budget reductions 203 (e) The Board should decide whether the government or instrumentality has made the appropriate measures to reduce expenditures or increase revenues and cancel the reductions Ongoing 1 Per PROMESA, these dates must be 15 days after end of each quarter 36

85 FINANCIAL CONTROLS Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit A Illegal Fiscal Plan Page 38 of 39 Budget and Forecasting process Define a timeline for each quarter s budget Certification process must adhere to PROMESA requirements Should include, but not be limited to: Certification process according to PROMESA requirements Reporting, external auditing, and variance certifications Set guiding principles for budget and forecasting Budget should be prepared Within the confines of the overall fiscal plan As a positive cash balance with sufficient safety margin, due to lack of access to capital markets Set, update, and track targets every quarter Use performance metrics, e.g.,: Status? On track / Delayed / Completed Reached target? Above / below past instances? Implement measures to correct variances from budget 37

86 FINANCIAL CONTROLS Case: LTS Doc#:1-1 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit A Illegal Fiscal Plan Page 39 of 39 Disbursement process Define disbursement process Implement a centralized disbursement digital database Set guidelines and principles Work to match budget to disbursement authorizations Identify an effective, centralized, and time-sensitive disbursement process that involves the adequate authorities Incorporate a mechanism that confirms alignment between revenues and expenses Centralize into a single Treasury account with a corresponding database Update and review periodically Set a minimum available liquidity threshold and an alertsystem Set, update, and track metrics every quarter Establish preventive measures Implement detective procedures to correct problems before they arise Design a process to correct variances from budget mid-year 38

87 Case: LTS Doc#:1-2 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit B Assureds March letter to the FOB Page 1 of 15 EXHIBIT B

88 Case: LTS Doc#:1-2 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit B Assureds March letter to the FOB Page 2 of 15 March 27, 2017 José B. Carrión III Andrew G. Biggs Carlos M. García Arthur J. González José R. González Ana J. Matosantos David A. Skeel, Jr. Dear Members of the Oversight Board: This letter is being sent by the following holders and insurers of bonds issued by the Commonwealth of Puerto Rico or its territorial instrumentalities (collectively, the Government of Puerto Rico ): The Ad Hoc Group of Puerto Rico General Obligation Bondholders (the GO Group ), which holds approximately $3 billion of bonds issued or guaranteed by the Commonwealth of Puerto Rico; Certain funds managed by Franklin Advisers Inc., certain funds managed by Oppenheimer Funds, Inc., and certain funds managed by Santander Asset Management, LLC (the Major COFINA Bondholders ), which hold approximately $3.65 billion of bonds issued by COFINA and approximately $1.85 billion of bonds issued or guaranteed by the Commonwealth of Puerto Rico; Assured Guaranty Corp. and Assured Guaranty Municipal Corp. ( Assured ) as insurer of approximately $1.75 billion of bonds issued or guaranteed by the Commonwealth of Puerto Rico, and approximately $1.675 billion of secured revenue bonds issued by HTA, PRCCDA, and PRIFA 1 (collectively, the Petitioning Creditors ): 2 On March 13, 2017, you certified the Fiscal Plan for Puerto Rico (the Fiscal Plan ). We write for the purpose of calling upon you to provide certain additional 1 2 The figures herein include Assured s gross par exposure for (i) GO and PBA bonds insured by Assured and (ii) HTA, PRCCDA, and PRIFA bonds insured by Assured. The Petitioning Creditors submit this letter exclusively on their own behalves and do not assume any fiduciary or other duties. The list of issues set forth herein is not intended to be a comprehensive list of all questions and disputes the Petitioning Creditors have concerning the Fiscal Plan (defined below). This letter does not purport to provide a full description of the parties rights, claims, and respective positions regarding any rights or remedies with respect to particular resources or the treatment of such under PROMESA. Each party hereto reserves all rights, and statements in this letter do not (and shall not be deemed to) represent each Petitioning Creditor s comprehensive view on a particular subject matter.

89 Case: LTS Doc#:1-2 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit B Assureds March letter to the FOB Page 3 of 15 2 information concerning the Fiscal Plan and to address certain deficiencies pertaining thereto. Although the Petitioning Creditors interests are diverse, we share an interest in expeditiously resolving the Government of Puerto Rico s financial crisis. As the Fiscal Plan states, it is intended to represent the basis upon which the Government and its creditor constituencies can, for the first time, conduct real and meaningful dialogue. (Fiscal Plan at 5.) If the Fiscal Plan is to serve as the basis for dialogue, it must persuade creditors, not dictate to them and creditors must fully understand the assumptions, analyses and rationales underlying the Fiscal Plan, so that the Government of Puerto Rico can reach an agreement with creditors and regain its desperately needed credibility with the capital markets. Respectfully, we believe that the Fiscal Plan violates many of the requirements of PROMESA. The Fiscal Plan also contains many unexplained numbers and assumptions that creditors need to understand before meaningful negotiations can occur. These include, but are not limited to: 3 $6.2 billion Reconciliation Adjustment in non-budgeted expenses, over a ten-year period; $1.8 billion increase in payroll expenses, over a ten-year period, compared to maintaining a 2017 run rate level; $500 million increase in operational expenses, over a ten-year period, compared to maintaining a 2017 run rate level; $9.3 billion in deficits at component units and other non-general Fund entities, over a ten-year period, with an annual growth rate of 10%; Tax collection rates and related assumptions embodied in the Fiscal Plan; Macro-economic assumptions, including components of GNP, the fiscal multiplier behind the projections for revenues and expenses, and the models behind the Fiscal Plan; and Any sensitivity analyses measuring the impact of recommendations from the Congressional Task Force on Economic Growth in Puerto Rico. The Petitioning Creditors have separately made prior attempts to engage you on these very topics. Unfortunately, we cannot see any reflection of our prior submissions. What s more, far from restoring the Government of Puerto Rico s access to the capital markets the first and last goal of PROMESA the Fiscal Plan seems designed to 3 Fiscal Plan numbers cited in this letter do not include the effect of amendments described in the Oversight Board Resolution adopted on March 13, 2017

90 Case: LTS Doc#:1-2 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit B Assureds March letter to the FOB Page 4 of 15 3 undermine it. We urge you to engage with us constructively and immediately on the topics that follow. The future of Puerto Rico depends on it. Accordingly, we highlight herein some of the key aspects of the Fiscal Plan that we believe require further consideration or potential amendment. Failure to Respect Lawful Priorities and Liens The Fiscal Plan simply ignores one of the enumerated requirements that Congress imposed on any fiscal plan, namely, that it respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality in effect prior to the date of enactment of this Act. (PROMESA 201(b)(1)(N).) Congress authorized the Oversight Board to certify a fiscal plan that satisfies such requirements. (Id. 201(c)(3) (emphasis added).) If a fiscal plan does not satisfy such requirements then the Board shall provide to the Governor a notice of violation. (Id. (emphasis added).) Here, the Commonwealth acknowledged that the Fiscal Plan did not comply with Section 201(b)(1)(N), and the Oversight Board stated that it did not have enough information to determine the Fiscal Plan s compliance with Sections 201(b)(1) (N). Instead of requiring correction, the Oversight Board certified the Fiscal Plan. 4 The Constitutional Debt Puerto Rico s Constitution expressly referenced in Section 201(b)(1)(N) clearly provides that, when available resources are insufficient to cover all of the Commonwealth s obligations, Constitutional Debt shall be paid first. (P.R. Const. Art. VI, Sec. 8.) Moreover, Puerto Rico s Management and Budget Office Organic Act, 23 L.P.R.A. 104(c), recognizes the constitutional requirement that payment on Constitutional Debt shall come first, and specifies that payments or disbursements related to certain contracts, public health, safety, education, welfare, pensions, and capital works and improvements shall only be made after payments on Constitutional Debt. By providing that payment on Constitutional Debt comes after all of the Commonwealth s expenditures, the Fiscal Plan violates Puerto Rico s Constitution and Section 201(b)(1)(N). We call upon you to correct this error or to explain why you believe this is not an error See Commonwealth Fiscal Plan, dated February 28, 2017 (the February 28 th Fiscal Plan ) (noting that compliance with Section 201(b)(1)(N) was ongoing. ); Letter from Oversight Board to Gov. Rosselló Nevares, at 1, fn. 1, dated March 9, Contrary to the testimony Chairman Carrión gave in Congress on March 22, 2017, this issue is not the issue raised in the litigation brought by the GO Group with regard to the COFINA structure. See Oversight Hearing on the Status of the P.R. Elec. Power Auth. (PREPA) Restructuring Support Agreement Before the Subcomm. on Indian, Insular and Alaska Native Affairs of the H. Comm. on Nat. Res., 115th Cong. (2017). Regardless of the outcome of that dispute, the Constitutional Debt is entitled

91 Case: LTS Doc#:1-2 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit B Assureds March letter to the FOB Page 5 of 15 4 The Major COFINA Bondholders and Assured s Positions 6 The Major COFINA Bondholders and Assured assert that the Fiscal Plan also violates Sections 201(b)(1)(M) and 201(b)(1)(N) in its treatment of COFINA, HTA, PRCCDA, and PRIFA. 7 The Major COFINA Bondholders maintain that the COFINA structure is valid and therefore the Fiscal Plan violates Section 201(b)(1)(M) by transferring COFINA s property to the Commonwealth s General Fund and violates Section 201(b)(1)(N) by failing to respect the COFINA bondholders lien on the assigned revenues granted to COFINA. Similarly, Assured has brought litigation challenging the Commonwealth s diversion of collateral that secures bonds issued by HTA, PRCCDA and PRIFA (each, an Authority ). Assured and other Authority bondholders contend that the diversion of collateral securing bonds issued by the Authorities is illegal and therefore the Fiscal Plan violates Sections 201(b)(1)(M) and (N) by transferring such revenues to the Commonwealth and failing to respect the lawful liens and priorities relating thereto. **** The Oversight Board has repeatedly stated that it takes no position on these disputes, but such indecision does not constitute compliance with Congress requirements under PROMESA. The Fiscal Plan takes all revenues and uses them for the payment of general expenses, without any regard to lawful priorities or liens. Regardless of how the above disputes may be resolved, that approach is plainly inconsistent with sections 201(b)(1)(M) or (N) of PROMESA. Identification of Essential Services The Fiscal Plan does not attempt to differentiate between expenses for essential services and expenses for non-essential services. While the Fiscal Plan lists this issue as one of the legal and contractual issues not determined by the Fiscal Plan, it is also a key economic issue. (Fiscal Plan at 6.) As certified, the Fiscal Plan presumes that all non-debt expenses are paid before any payments are made on debt service, yet the Oversight Board and the Government of to be paid before all other Commonwealth expenditures. And regardless of the outcome of that dispute, the Fiscal Plan violates Section 201(b)(1)(N) of PROMESA. 6 7 For the avoidance of doubt, the GO Group has not signed on to any portion of this letter stating or implying that the COFINA structure is valid and the Major COFINA Bondholders have not signed on to any portion of this letter implying that the COFINA structure is not valid. As you know, the GO Group has brought litigation challenging the transfer of sales and use tax revenues to COFINA.

92 Case: LTS Doc#:1-2 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit B Assureds March letter to the FOB Page 6 of 15 5 Puerto Rico have never explained the legal or commercial basis for such a waterfall in the Fiscal Plan. We therefore ask you to address the following questions: 1. What is the legal basis for that waterfall? 2. Does this basis depend, in your view, on whether the expenses are for essential services? 3. If the answer to question 2 above is yes, what portion of the projected annual expenses are for essential services and what are those services? If the Fiscal Plan does not distinguish between essential and non-essential services, how can it meet the requirements of PROMESA? It is not plausible that 100% of the approximately $18 billion in average annual expenses projected under the Fiscal Plan are for essential services. The persistent refusal of the Oversight Board and the Government of Puerto Rico to address this obvious question is telling. Reconciliation Adjustment As certified, the Fiscal Plan includes an incremental $6.2 billion Reconciliation Adjustment based upon the assumption that the Government of Puerto Rico will not adhere to its budget, which will be approved by the Oversight Board. Moreover, and notwithstanding the reforms proposed by the Oversight Board and the Government of Puerto Rico, the Fiscal Plan actually projects that this cushion will grow steadily over the next decade. (Fiscal Plan at 14 (noting steady increase until ).) In other words, the Fiscal Plan asks creditors in addition to subordinating themselves to all government expenses, whether essential or not to further assume that the Government of Puerto Rico will need an annual cushion of approximately $600 million to pay for non-budgeted expenses. To reach such an expense level, the Government of Puerto Rico must not only miss this fiscal year s cost-reduction targets, but also reverse last year s expense reductions and then grow expenses from fiscal year 2015 levels. Creditors are asked to make this assumption despite the Government of Puerto Rico s recent efforts to implement zero-based budgeting for each department. 8 Incorporating this significant contingency reserve is contrary to the express language of PROMESA. First, Section 202 requires that the Oversight Board, the Governor, and the Legislature develop annual budgets for certain covered entities through an iterative process. To be approved, such budgets must be compliant budgets, i.e., consistent with the Fiscal Plan. (PROMESA 202(e).) One of the key requirements for 8 The E&Y Report does not explain or necessitate this contingency reserve. The E&Y Report is based primarily on projections from fiscal years 2014 and 2015 and de-emphasizes figures from fiscal year 2016 that reduce the impact of its conclusions.

93 Case: LTS Doc#:1-2 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit B Assureds March letter to the FOB Page 7 of 15 6 any fiscal plan is to eliminate structural deficits, which is contrary to the very inclusion of a Reconciliation Adjustment. (PROMESA 201(b)(1)(D).) Second, Section 203 requires the Government of Puerto Rico to submit quarterly reports to the Oversight Board detailing whether the Government of Puerto Rico is in compliance with its approved budget. In the event that the Government of Puerto Rico is not in compliance with its approved budget, the Oversight Board shall make appropriate reductions in nondebt expenditures to ensure that the actual quarterly revenues and expenditures for the territorial government are in compliance with the applicable certified Territory Budget. (PROMESA 203(d)(1) (emphasis added).) The Fiscal Plan ignores these requirements and instead permits (i) structural deficits to persist into perpetuity, and (ii) the Government of Puerto Rico to build in a significant cushion upfront (a reserve nearly equal to the annual amount dedicated to debt service), and thereby reduce funds available for debt service. Congress clearly stated that structural deficits were to be eliminated and that if interim revenue/expense gaps arose, budgetary adjustments should be made from nondebt expenditures. The net result of affording a $6.2 billion budgetary cushion would appear to defeat one of PROMESA s primary goals, i.e., fiscal discipline. Further, the assertion that the contingency reserve and non-essential services should lawfully come before all debt service creates an environment that requires an examination of limits arising under the United States and Commonwealth constitutions and will certainly impact the broader municipal bond market. Other Expense Assumptions The Fiscal Plan contains billions of dollars in other expenses that require further detail for the Petitioning Creditors to understand. In contrast to the February 28 th Fiscal Plan, the Fiscal Plan that the Oversight Board certified increased payroll expenses by more than $1.5 billion and increased operational expenses by more than $400 million over a ten-year period. Neither the Oversight Board nor the Government of Puerto Rico has explained why the growth rate for expenses increased so significantly between February 28 th and March 13 th. Instead of instilling the necessary discipline to maintain fiscal year 2017 run rate expense levels, the Fiscal Plan allows payroll expenses and operational expenses to grow, which increases expenses by over $2.3 billion over a ten-year period. The Petitioning Creditors are entitled to understand the analysis that led to revising these amounts. The Fiscal Plan also includes expenditures that are not related to the General Fund or services provided by the central government of Puerto Rico. In particular, the Fiscal Plan includes $7.4 billion over a ten-year period in component unit expenses including ASEM, ASES, ADEA, PRIDCO, PRITA, Tourism, and UPR deficits. (Fiscal Plan at 14.) In all, deficits at component units and other non-general Fund entities have likewise increased without explanation by $715 million compared to the February 28 th Fiscal Plan over a ten-year period. Moreover, the Fiscal Plan assumes a compound annual growth rate of approximately 10% for such expenses. This rampant expense growth

94 Case: LTS Doc#:1-2 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit B Assureds March letter to the FOB Page 8 of 15 7 leads to a $3.2 billion incremental deficit at these component units and non-general Fund entities, above the fiscal year 2017 run rate levels. To facilitate meaningful negotiations of a potential restructuring, the Petitioning Creditors must understand why the Government of Puerto Rico is forecasting $9.3 billion in expenses over a ten-year period to component units and other non-general Fund entities, and why those expenses, together with the General Fund s payroll and operating expenses, increased by more than $2.6 billion over a ten-year period compared to the February 28 th Fiscal Plan. Macro-Economic Assumptions The Fiscal Plan is built on a number of key macro-economic assumptions that are not sufficiently explained. In particular, the Fiscal Plan fails to disclose the components of GNP and the fiscal multiplier that drive the revenue and expense projections. The Petitioning Creditors need access to this critical information, including access to the underlying models on which the Fiscal Plan is built, to perform necessary diligence on the Fiscal Plan. This would enable the Petitioning Creditors to better understand, for example, why certain expenses appear to grow at a higher rate than revenues and overall inflation, and why the Government of Puerto Rico s proposed structural reforms are not projected to have a more significant positive effect on GNP. Full access to these models and assumptions is critical to advancing negotiations. Privatization The Fiscal Plan fails to take into account any potential privatization of government assets, or the reductions in expenses that would accompany such privatization. On December 20, 2016, the Oversight Board stated that [b]y privatizing a number of government assets, such as real estate, the state insurance fund and ports, for example, Puerto Rico could fund near-term initiatives on a one-time basis, and potentially achieve better service levels at a lower cost. Government assets should be monetized with the specific aim of funding one-time investments in infrastructure development, like upgrading to broadband internet connections, and not funding continuous operations. 9 Similarly, when seeking proposals from advisors, the Government of Puerto Rico has twice sought an advisor with expertise in asset valuations, sales and privatizations. 10 Despite the Oversight Board s and the Government of Puerto Rico s recent interest in such measures, the Fiscal Plan ignores the possibility of privatizing 9 10 Letter from Oversight Board to Gov. García Padilla and Gov. Elect Rosselló Nevares, dated December 20, Request for Qualifications for Omnibus Infrastructure Public-Private Partnership Advisor, dated March 21, 2017; Request For Proposals for Role of Strategic and Financial Advisor, Puerto Rico Fiscal Agency and Financial Advisory Authority, dated January 3, 2017.

95 Case: LTS Doc#:1-2 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit B Assureds March letter to the FOB Page 9 of 15 8 government assets and the attendant fiscal benefits. If executed effectively, privatization should produce measurable economic benefits through one-time cash infusions, a reduction in public capital funding requirements, and significant decreases in operational expenditures none of which appear in the Fiscal Plan. Tax Collection Rates The Fiscal Plan fails to account for potentially significant additional revenues generated from improved tax collection and compliance reforms. It is widely understood that the Government of Puerto Rico s historical collection rates are low (for example, collection of sales and use tax ( SUT ) was estimated to be no more than 67.9% in fiscal year 2016). 11 During his recent State of the Commonwealth Address, Governor Rosselló Nevares stated that improved tax collection would be a focus of his administration and would significantly increase the Government of Puerto Rico s revenues. 12 However, the Fiscal Plan contemplates only modest improvements in tax collection rates. Given the impact that improved tax collection rates would have on the Government of Puerto Rico s revenues, we expect that the Oversight Board is supportive of these proposed compliance reforms. For example, based on 2016 SUT collections, each 1% improvement in collection rates represents an incremental $35 million in revenues. The Department of Hacienda under the prior administration projected a sustained 12%-17% improvement in SUT collections over the coming ten years, representing an incremental $420 million to $595 million annually on SUT revenues alone. 13 Accordingly, the Oversight Board should provide the Petitioning Creditors with the collection rates that are implied in the Fiscal Plan and allow the Petitioning Creditors to test such assumptions in light of the Government of Puerto Rico s proposed reforms. Understanding the Oversight Board s assumptions regarding collection rates is also critical in light of recent data demonstrating that the Government of Puerto Rico is surpassing prior estimates. In particular, through February of fiscal year 2017, General Fund net revenues are approximately 3.5% higher than initially forecast, representing a $184 million increase over projections ($5.41 billion vs. $5.22 billion). 14 Similarly, through February 28, 2017, Government of Puerto Rico revenues are approximately 1.7% higher than revenues over the same period in 2016, and revenues for fiscal year Puerto Rico Departamento de Hacienda, Secretario de Hacienda anuncia alza de 4.2 puntos porcentuales en la tasa de captación del Impuesto sobre Ventas y Uso (IVU) en el año fiscal 2016, Press Release, Nov. 15, Rossello s Fiscal Plan Falls Short by $800M, REORG RESEARCH, Feb. 28, Puerto Rico Departamento de Hacienda, Índice de Captación del Impuesto sobre Ventas y Uso (IVU), Executive Summary, Apr Puerto Rico Departamento de Hacienda, Hacienda recauda $776.6 millones en febrero, $9.0 millones más que el año anterior y $7.4 millones menos que la proyección, Press Release, Mar. 21, 2017.

96 Case: LTS Doc#:1-2 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit B Assureds March letter to the FOB Page 10 of 15 9 were 2.4% higher than revenues in fiscal year Given these recent trends, the Petitioning Creditors should understand why the Oversight Board adopted more pessimistic assumptions than initially proposed by the Government of Puerto Rico. Federal Health Care Funds As set forth in the February 28 th Fiscal Plan, the expiration or continuation of funding under the Affordable Care Act has a significant effect on the Government of Puerto Rico s revenues and expenses. Although the outcome is undetermined at this time, it seems likely that Congress may act before December 31, It is difficult to assess the Fiscal Plan without considering the significant effect that federal health care funding has on the Government of Puerto Rico s budget and longterm fiscal outlook. To avoid informational asymmetries or other strategic impediments, we believe that the Oversight Board, acting together with the Government of Puerto Rico and the Congressional Task Force on Economic Growth in Puerto Rico (the Task Force ), should immediately seek assistance from Congress (and other applicable agencies and departments) to restore federal health care funding and bring certainty to the Government of Puerto Rico. The future of federal health care funding is critical to the Government of Puerto Rico because of the spillover effect that it may have on population migration and therefore virtually every aspect of the Fiscal Plan. The Task Force announced its federal health care recommendations on December 20, Implementing the Task Force s recommendation should be an immediate concern of the Oversight Board, and cannot wait until after creditor negotiations. Task Force Report The Fiscal Plan does not incorporate the numerous recommendations contained in the Task Force s December 20, 2016 Report to the House and Senate (the Task Force Report ). Many of the Task Force s recommendations address economic development initiatives and ways in which the Government of Puerto Rico can better utilize federal resources. At a minimum, creditors should have access to any sensitivities analyses measuring the impact of the Task Force s recommendations so they can understand the determination not to include those recommendations. Access to the Capital Markets Congress said that the purpose of any fiscal plan is to provide Puerto Rico a method to achieve fiscal responsibility and access to the capital markets. (PROMESA 15 Id.; Puerto Rico Departamento de Hacienda, Hacienda informa que los ingresos netos al Fondo General del año fiscal totalizaron $9,175.3 millones; $214.4 millones o 2.4% más que el año fiscal anterior y 98.7% del estimado total revisado, Press Release, July 28, 2016.

97 Case: LTS Doc#:1-2 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit B Assureds March letter to the FOB Page 11 of (b)(1).) Indeed, the Government of Puerto Rico s ability to access the capital markets goes hand-in-hand with its ability to implement pro-growth measures, and therefore successfully implement the Fiscal Plan. Unfortunately, the Fiscal Plan undermines investor confidence in Puerto Rico s commitment to paying debts, making Puerto Rico unlikely to be able to regain access to the credit markets at reasonable interest rates. After the Oversight Board certified the Fiscal Plan, trading prices of the Government of Puerto Rico s bonds fell. This indicates that investors have reduced confidence in the Commonwealth s and Oversight Board s willingness to pursue consensual settlements as favored by PROMESA and portends protracted and expensive litigation that will inhibit the Government of Puerto Rico s access to capital sorely needed to spark economic recovery on the island. Moreover, the Oversight Board s assumptions in the Fiscal Plan regarding, among other things, required amortization of principal in the debt sustainability analysis are inconsistent with the assumption that the Government of Puerto Rico regains capital market access. The inability to access capital markets will only exacerbate the Government of Puerto Rico s fiscal crisis by preventing it from refinancing its indebtedness at lower interest rates at maturity. Treatment of Claw-back Revenues The Government of Puerto Rico and the Oversight Board also suggest that the Fiscal Plan does not determine the scope, timing, or specific use of revenues to be frozen or redirected as claw back revenue. (Fiscal Plan at 6.) In fact, the Fiscal Plan does determine, in clear violation of PROMESA, the use of some claw back revenues that are assumed to be clawed back. While the Petitioning Creditors may have differing views as to the nature of their rights regarding these funds, 16 they are unanimous in agreeing that the Fiscal Plan improperly assumes that revenues generated by a valid claw back may be disposed of at the Commonwealth s discretion. There is no basis upon which to explain the Fiscal Plan s treatment of these funds, other than a complete disregard for the rule of law. In no sense does the Fiscal Plan show the respect for lawful liens and priorities as required by PROMESA with respect to these monies. The enabling statutes, authorizing resolutions, and offering circulars for each of the claw back bonds expressly provide that the pledged revenues, which include taxes on gasoline, petroleum, cigarettes, rum, and hotel rooms, and vehicle license and registration fees, may only be clawed back (upon satisfaction of certain conditions) to pay 16 It bears repeating that this letter does not purport to encompass the full scope of any Petitioning Creditor s legal position, and each Petitioning Creditor hereby reserves all rights regarding these and other issues.

98 Case: LTS Doc#:1-2 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit B Assureds March letter to the FOB Page 12 of Constitutional Debt, and not for any other purpose. 17 Former Governor García Padilla acknowledged this in Administrative Bulletin No. OE , which stated that any funds clawed back and retained by the Department of Treasury shall be held in a segregated account and shall only be used for the payment of Constitutional Debt. 18 The current administration recognized the same thing when it recently announced that it would segregate claw back revenues in a trust for the payment of constitutionally guaranteed general obligation bonds. 19 The Fiscal Plan, however, assumes that the revenues may be clawed back (without discussing the stated conditions therefore), but does not segregate claw back revenues for the payment of Constitutional Debt. Instead, the Fiscal Plan allows such revenues to apparently be used for any and all purposes at the Commonwealth s discretion. For example, the Government of Puerto Rico has identified $978 million 20 of claw back and other pledged funds in fiscal year 2017 alone, but the Fiscal Plan does not segregate these revenues for the payment of Constitutional Debt. Even more, the Fiscal Plan provides only $404 million and $567 million in total debt service for fiscal years 2018 and 2019, respectively, thereby guaranteeing that the Government of Puerto Rico with the Oversight Board s blessing will in fact use claw back revenues for purposes other than debt service on Constitutional Debt. Because the Fiscal Plan ignores that, assuming claw back revenues are appropriately clawed back, such revenues should be used to pay Constitutional Debt, it violates PROMESA Section 201(b)(1)(A)(i), which requires that all revenue projections be based on applicable laws. **** The Petitioning Creditors respectfully request the opportunity to immediately discuss these specific issues with the Oversight Board and the Government of Puerto Rico in a constructive and cooperative manner. We believe that these discussions will significantly help advance negotiations and our shared goal of reaching an expeditious and consensual resolution under Title VI of PROMESA. 17 For example, these provisions provide that pledged revenues are subject to being applied first to the payment and amortization of the public debt in accordance with the provisions of Section 8 of Article VI of the Constitution of Puerto Rico if needed therefor. 18 Indeed, in the second half of fiscal year 2016, the García Padilla administration did segregate at least $146 million in a Banco Popular account and deposited an additional $143 million at the Government Development Bank. During fiscal year 2017, however, the Commonwealth has failed to segregate any claw back revenues and instead appears to be using such revenues to fund other Commonwealth expenses. 19 Sánchez Provides Update on $146M GO Payment Trust Fund, REORG RESEARCH, Feb. 15, This amount is inclusive of the $115 million in special property tax to be levied to support Constitutional Debt pursuant to Act

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102 Case: LTS Doc#:1-3 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit C Assureds April letter to the FOB Page 1 of 5 EXHIBIT C

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107 Case: LTS Doc#:1-4 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit D Senators April letter to the FOB Page 1 of 3 EXHIBIT D

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110 Case: LTS Doc#:1-5 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit E FOBs April Response to the Senators Page 1 of 14 EXHIBIT E

111 Case: LTS Doc#:1-5 Filed:05/03/17 Entered:05/11/17 15:25:55 Desc: Exhibit Exhibit E FOBs April Response to the Senators Page 2 of 14 José B. Carrión III Chair BY ELECTRONIC MAIL FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO Members Andrew G. Biggs Carlos M. García Arthur J. González José R. González Ana J. Matosantos David A. Skeel, Jr. Natalie A. Jaresko Executive Director April 25, 2017 U.S. Senator Thom Tillis c/o Towers_Mingledorff@Tillis.senate.gov U.S. Senator Tom Cotton c/o Brian_Colas@Cotton.senate.gov Re: FOMB Response to Your Letter dated April 7, 2017 (the Letter ) Dear Senators Tillis and Cotton: The Financial Oversight and Management Board for Puerto Rico ( FOMB ) has received and reviewed your Letter and very much appreciates this opportunity to respond. 1 FOMB s Statutory Mission: The Mission: PROMESA section 101(a) provides the purpose of the FOMB is to provide a method for Puerto Rico to achieve fiscal responsibility and to restore access to the capital markets. Returns to Creditors: Subject to the objectives of achieving fiscal balance and market access, which can only be achieved by ensuring economic growth in 1 The Letter expresses concerns stemming from certain responses we recently provided at the March 22 hearing of the House Committee on Natural Resources Subcommittee on Indian, Insular, and Alaska Native Affairs. PO Box San Juan, PR ; comments@oversightboard.pr.gov