APPENDIX I PUERTO RICO SALES TAX FINANCING CORPORATION ANNUAL FINANCIAL INFORMATION AND OPERATING DATA REPORT

Transcription

1 APPENDIX I PUERTO RICO SALES TAX FINANCING CORPORATION ANNUAL FINANCIAL INFORMATION AND OPERATING DATA REPORT

2 PUERTO RICO SALES TAX FINANCING CORPORATION ANNUAL FINANCIAL INFORMATION AND OPERATING DATA REPORT Dedicated Sales Tax Fund Act No , as amended ( Act 91 ), established the Dedicated Sales Tax Fund, a special fund held and owned by the Puerto Rico Sales Tax Financing Corporation (the Corporation ) separate and apart from the General Fund of the Government of Puerto Rico (the Government ). Act 91 requires that the following amounts of the Commonwealth Sales and Use Tax ( SUT ) be deposited in the Dedicated Sales Tax Fund, whichever is greater: (i) a minimum fixed amount, referred to as the Pledged Sales Tax Base Amount, and (ii) the product of the amount of the SUT collected during such Fiscal Year multiplied by a fraction, the numerator of which is two point seventy-five percent (2.75%) and the denominator of which is five point five percent (5.5%) (the greater of (i) and (ii) being referred to as the Pledged SUT ). Act No ( Act 18 ) modified the distribution of SUT collections transferred to the Corporation and subsequently received by the Government by (i) increasing the Government s portion of the SUT from 5.5% to 6.0% effective February 1, 2014 and (ii) creating the Municipal Administration Fund ( MAF ). Act No , however, amended Act 18 and Act 91 to separate the SUT collections transferred to the Corporation from those transferred to MAF. As a result, (a) the Corporation continues to have the right to receive an amount equal to the greater of (i) the Pledged Sales Tax Base Amount and (ii) the Pledged SUT; and (b) the MAF will receive 0.5% of the Commonwealth s portion of the SUT. Deposits to the MAF will be made concurrently with deposits of the Pledged SUT and before making any deposits to the Government s General Fund. The Government will receive the amounts remaining after the Pledged SUT has been transferred to the Corporation, but not more than 2.75% of the 5.5% allocation of the SUT. In each Fiscal Year, the first collections of the 5.5% allocation of the SUT are deposited in the Dedicated Sales Tax Fund and applied to fund the Pledged SUT. The Pledged Sales Tax Base Amount for the Fiscal Year beginning July 1, 2016 is $724,109,885. The Pledged Sales Tax Base Amount increases each Fiscal Year thereafter at a statutory rate of 4% up to $1,850,000,000. The moneys on deposit in the Dedicated Sales Tax Fund are used for the payment of the Corporation s bonds or to satisfy the purposes set forth in Act 91. In anticipation of a bond issuance by the Corporation in the second half of fiscal year 2014, legislation was approved in October 2013 to increase the portion of the allocation of the SUT transferred to the Corporation from 2.75% to 3.50%. Since the Corporation bond issue was postponed, Act , enacted in June 2014, suspended the transfer of these additional funds to the Corporation until the fiscal year following the year in which the Corporation bond issue is completed. As of the date of this report, the Corporation has not completed such bond issue. Act No , as amended, provided for the replacement of the SUT with a value added tax, among other things. The imposition of the value added tax was scheduled to commence on June 1, Act No amended Act 91 to, among other things, include specific references to those sections of the Puerto Rico Internal Revenue Code that impose the SUT at a rate of 6.0% and provide that, once the value added tax replaces the SUT, the Corporation will receive an amount equal to 6.0% of such value added tax. Act No , however, repealed

3 the provisions of the Puerto Rico Internal Revenue Code providing for the replacement of the SUT with a value added tax. As a result, those provisions referencing the value added tax are no longer applicable. On April 6, 2016, the Government approved Act No authorizing the Governor to, among other things, declare a moratorium with respect to certain Government instrumentalities, including the Corporation. A moratorium, however, has not been declared with respect to the Corporation. On April 28, 2017, the Puerto Rico Fiscal Agency and Financial Advisory Authority released a proposed restructuring plan for the Corporation s debt. A copy of the proposed restructuring plan is available on the Electronic Municipal Market Access System (EMMA). On April 29, 2017, the Governor of Puerto Rico signed into law House Bill 938, which, among other things, requires public corporations to transfer to the Government any excess revenues generated by such public corporation. Such excess revenues shall be deemed available resources of the Government and be deposited to the credit of the General Fund in order to satisfy the liquidity requirements of the Fiscal Plan approved in accordance with PROMESA. The amount of funds to be transferred to the General Fund shall be determined by a committee comprised of the Executive Director of the Puerto Rico Financial Advisory and Fiscal Agency Authority, the Secretary of the Treasury and the Director of the Office of Management and Budget. The committee is required to ensure that the amount of funds so transferred to the General Fund does not affect the services offered by the particular public corporation and that such amounts are determined after such public corporation's operational expenses and obligations have been covered. House Bill 938 also authorizes the Executive Branch to use the Pledged SUT solely as a last resort and subject to providing the Legislative Assembly with a sworn statement establishing the need for such use, the term of such use and the amount of funds to be used, to cover an occasional significant cash flow deficiency to comply with the Government's Fiscal Plan. The statement is required to be signed and sworn by the Executive Director of the Puerto Rico Financial Advisory and Fiscal Agency Authority and the Director of the Office of Management and Budget. The signature and swearing of the statement shall be nondelegable. Those government officers shall also certify that the information is correct, exact and true consistent with the Government's fiscal reality. No such statement has been proposed or provided to the Legislative Assembly at this point. It is not yet clear how this law would affect the current legal regime for the Corporation. The Corporation intends to continue to defend the lien established by the Corporation Resolution as required thereby. The Corporation has received a letter from a bond insurer that claims that as a result of the passage of House Bill 938 an event of default has occurred under to the Amended and Restated Sales Tax Revenue Bond Resolution, adopted on July 13, 2007 and amended June 10, 2009 (the Corporation Resolution ) or may be declared if not cured within thirty (30) days.

4 Pledged SUT Received by the Corporation The Pledged Sales Tax Base Amount for the Fiscal Year ended June 30, 2016 was $696,259,504. For Fiscal Year 2016, The Bank of New York Mellon, as Trustee for the Corporation, received $696,259,504 of Pledged SUT. Recent Developments Lex Claims, LLC. et al. v. Alejandro García Padilla, et al., No. 3:16-cv-2374 (FAB) (D. P.R. 2016). On July 20, 2016, certain beneficial owners of general obligation bonds issued by the Government filed a complaint against the Governor, Secretary of the Treasury, and Director of the Office of Management and Budget of Puerto Rico seeking declaratory and injunctive relief under the Puerto Rico Oversight, Management and Economic Stability Act ( PROMESA ), to invalidate an executive order imposing an alleged moratorium on payment of debt owed to them, to invalidate a budget that they claim purported not to pay debt owed to them (and that instead made improper transfers to the Government Development Bank and others), and to reverse certain allegedly improper transfers that would supposedly dissipate assets needed for payment of their debt. It also sought, as a second cause of action, relief from the otherwise automatic stay on litigation imposed by PROMESA. An amended complaint was filed on August 15, 2016, followed by a notice or motion of stay filed by Defendants on August 22, 2016, which the Court denied on September 2, Defendants filed a motion to dismiss that same day, and a motion to reconsider the denial of stay on September 7, On October 7, 2016, the Plaintiffs proposed to amend their Complaint to include a number of other Defendants, among them the Corporation and Mr. Juan Vaquer, as Executive Director of the Corporation (collectively, the Corporation Defendants ), as well as the corporate Trustee (The Bank of New York Mellon) for the debt issued by the Corporation. Plaintiffs also moved to lift an automatic stay against litigation imposed by PROMESA with respect to the new Defendants. On October 24, 2016, the first of a number of motions to intervene was filed by other holders or owners of debt (in this initial instance, beneficial owners of senior debt issued by the Corporation. Eventually beneficial owners of both senior and subordinate Corporation debt; various bond insurers insuring certain Corporation debt, certain general obligation debt, or both; and the Financial Management and Oversight Board for Puerto Rico (the Oversight Board ), would seek to intervene (and would eventually succeed). On November 4, 2016, the Court denied the motions to reconsider staying the case made by the initial Defendants (and thus held that the PROMESA stay was not, in fact, automatic as to certain claims). That same day, a Second Amended Complaint was filed pursuant to permission

5 granted by the Court. In this pleading, Plaintiffs for the first time challenged the Corporation s legality and the legality of the senior and subordinate debt it had issued. Five Counts of the Second Amended Complaint numbers 2, 4, 5, 12, and 13 name the Corporation Defendants. Of these five counts, two of them, numbers 2 and 12, were not (according to the Court s prior orders) subject to the automatic stay pursuant to Section 405(b) of PROMESA. On December 5, 2016, the initial Defendants answered and raised affirmative defenses to the Second Amended Complaint. On December 16, 2016, the Corporation Defendants similarly filed an answer and affirmative defenses on the grounds that the claims against them lack a proper legal basis and are subject to various legal and equitable affirmative defenses. The Trustee filed a motion to dismiss that same day, which was eventually fully briefed (but has not been decided). As the Corporation Defendants pointed out in their answer, the Corporation had first issued sales tax revenue bonds pursuant to the Corporation Resolution. The proceeds of the Pledged SUT from sales taxes validly imposed by the Government are the only source for payment of those bonds and the balance of the of the Corporation s indebtedness. The Corporation Defendants alleged that all of these facts (and others establishing or asserting the constitutionality of the Corporation and its debts and the existence of the lien on the Pledged SUT) have been known to Plaintiffs or their predecessors for approximately a decade, during which time no one ever challenged the legality of the Corporation or the Corporation debts. The motion of the Oversight Board to intervene was denied by the Court on February 17, On March 3, 2017, the Oversight Board appealed to the United States Court of Appeals for the First Circuit. While this was pending, various intervenors which had answered the Second Amended Complaint moved (beginning on March 18, 2017) for judgment on the pleadings, in effect seeking to dismiss the Plaintiffs case, and to certify certain questions (including effectively issues of the validity of the Corporation debt) to the Puerto Rico Supreme Court. Those motions were eventually briefed, but not decided. On March 20, 2017, efforts began by some parties to pursue mediation, either by order of the Court or voluntarily. That same day, before the deadline by which the Corporation Defendants needed to join in certain motions, the United States Court of Appeals reversed the denial of the Oversight Board s motion to intervene and held that the PROMESA stay applied to the litigation as a whole. In response to various orders of the Court concerning its ability to impose court-ordered mediation during a stay, the parties eventually began a voluntary mediation process. That process is currently continuing. The automatic stay under PROMESA will expire on May 1, 2017.

6 Designation of the Corporation as a Covered Territorial Instrumentality and Approval of the Government s Fiscal Plan One of the roles of the Oversight Board is to provide fiscal oversight through the development and approval of fiscal plans and budgets for the Government and any instrumentalities that become covered territorial instrumentalities (as such term is defined in Section 5 of PROMESA) by virtue of designation by the Oversight Board pursuant to Section 101 of PROMESA. On September 30, 2016, the Oversight Board resolved to designate certain entities of the Government and all public corporations of Puerto Rico, as well as the affiliates and subsidiaries thereof, as covered territorial instrumentalities subject to the oversight framework provided by PROMESA. Such designations include, among others, the Corporation. On February 28, 2017, the Government filed a proposed fiscal plan with the Oversight Board (the Proposed Fiscal Plan ). The Oversight Board rejected the Proposed Fiscal Plan. The Government then submitted an Amended Fiscal Plan (the Fiscal Plan ), which was certified by the Oversight Board on March 13, 2017 as satisfying the requirements set forth in PROMESA. The Fiscal Plan, among other things, assumes that the Government will retain and use the revenues generated by the SUT, including the Pledged SUT, to cover its operating expenses rather than service the Corporation s issued and outstanding debt. The Corporation intends to continue to defend the lien established by the Corporation Resolution as required thereby. For further information regarding the Fiscal Plan, please refer the copy of the Fiscal Plan filed by the Government with the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access system ( EMMA ). For further information regarding these designations, please refer to PROMESA and the Oversight Board s website ( For more information regarding the Commonwealth, the Corporation and PROMESA, please refer to the Commonwealth Financial Information and Operating Data Report December 18, 2016 filed by the Government with EMMA.