BREAKING NEWS: Puerto Rico treasury secretary testifies at third day of Walmart trial

The notes contained in this post formed the basis for a full article on the day’s events.
I am leaving the old post active for reference, but striking through its content.

by Gil Hall @gillamhall

San Juan, Puerto Rico

Updated 20160205 for typos and clarifications

This is a breaking story, and the information was dictated and therefore may contain. typos. This information was provided at 12:47 AST

On the third day of the Walmart vs. Puerto Rico trial, Walmart called an expert witness with extensive experience in restructuring governmental and nonprofit organizations. Martha Kopacz was, in fact, appointed by Judge Steven Rhodes as his independent expert in the Detroit chapter 9 bankruptcy case.

Based on her analysis, Kopacz stated in her formal report that “PR is insolvent and as such which obligations it chooses to make are uncertain”

When asked to name the areas she studied to reach to this conclusion, she listed four: 1 Liquidity. 2. Access to markets 3. Existence of defaulted obligations 4. Criteria Government has claimed it will used to determine the order of priority for payments

Walmart’s attorney read a quote from Melba Acosta’s US Senate testimony, in which Acosta says Puerto Rico was beyond the tipping point. The attorney asked the witness: based on your extensive experience do you think Puerto Rico’s crisis is the worst in generations. She answered: “I absolutely agree with Acosta.”

Witness stated existing budget has to be used to pay debt and can’t be used to provide services.”

Walmart’s attorney asked the witness what will happen in June when $700 million that is owed on the general obligation bonds in addition to another $500 million of other obligations must be paid. The witness answered: “the Commonwealth will default.”

When the witness was presented a confidential balance sheet used by the governor’s working group–a document she had previously seen and analyzed – she said: “the Commonwealth and GDB are out of cash.”

The witness had previously seen and studied a draft of the “going concern” memo discussed in yesterday’s testimony of Melba Acost. Kopacz commented: “it is confirming to me in terms of my view that the Commonwealth is insolvent.”

The witness said that until Puerto Rico has a credible plan of action and convinces the market it is responsible, the muni market will remain close to Puerto Rico.

When discussing the order of payment priorities listed in the governor’s executive order she said that it suggested “a restructuring is inevitable.”

Before the witness was turned over for cross examination she summed up her testimony as: “Puerto Rico is insolvent. Whatever debt it chooses to pay is uncertain.”

In its cross-examination, Puerto Rico attempted to prove that the witness did not have sufficient data to reach reasonable conclusions. They sought to compare her work in Detroit – in which she produced many documents of many hundred pages over the course of years – with her relatively short analysis of the situation in Puerto Rico. The witness became somewhat exasperated with Puerto Rico’s attorney who awkwardly asked the same series of questions multiple ways.

The witness was asked if she used other experts’ reports in coming to her conclusion. She stated that, yes, she did. She said that she talked to as many stakeholders as she could, read as much material as she could, and then carefully considered the information its totality before she reached her own independent conclusion.

Puerto Rico’s attorney asked her what people would say about her report on Puerto Rico 10 years from now. The witness replied: “people will look back at February 2016 and say Puerto Rico was insolvent. Absolutely.”

In a final set of questions, the attorney for Puerto Rico asked if the witness had considered the significance of what a loss in this case would mean to Puerto Rico.

Witness answered: “no.” If the AMT at question is, in fact, determined to be illegal, then Puerto Rico “would have no right to rely on revenue it’s not entitled to to pay for essential services.”

The second witness called to the stand by Walmart was the Treasury Secretary Juan Zaragoza. Although his testimony had been greatly anticipated, in actual fact his answers merely supported most of the claims Walmart has already made, and offered no additional surprises.

Walmart’s attorney opened by asking him if he faulted Walmart for bringing the case. His answer: “no, it’s there right.”

When queried as to whether or not Walmart had ever been suspected of not paying the taxes owed on the actual amount of transaction volume, the secretary said: “they were not in the list of companies we were concerned about”

The secretary indicated that the treasury is only now processing all of the 2013 tax returns. He repeatedly stressed that much of the data the Walmart attorney was asking about was three years old.

The secretary admitted that quote based on three-year-old data parenthesis on 2012 data parenthesis Walmart was the only one” who fell into the highest bracket of AMT taxes

The Walmart attorney asked the secretary if the tax proposals made were purely to raise revenues–implication: and not to deter abuse of transfer tax pricing – the secretary answered: “that’s right.”

The secretary indicated that the treasury had hired Price Waterhouse Cooper’s to do an analysis of transfer pricing shortly after the February 2015 testimony earlier referenced. The secretary indicated that PriceWaterhouseCooper had recently delivered this analysis. The implication is that the data necessary to create a fair, equitable alternative minimum tax has only recently become available.

The secretary’s testimony will continue after lunch.

About Gil Hall

Currently writing book on PR crises. Working title: "Los Pertrechos: the Story of an Economy". Polyglot prone to prolixity in English, German &, Spanish. Based between San Juan and North Carolina. MBA/MHA.