COMISION PARA LA AUDITORIA INTEGRAL DEL CREDITO PUBLICO Puerto Rico Comm forthe Compre uit ofthe Public Cree Praaudit Survey ReportPuerto Rico Commission forthe Comprehensive Audit ofthe Public Creit Survey Report Executive Summary Law 97 of 2015 ereted the Commission forthe Comprehensive Aueit of Puerto Rico's Public Credit ("Commission"). The Commission is comprised of 17 menbers selected from civil society stakeholders including: lected offical, representatives of financial institutions, credit unions, academies, and organized laber. The Commission requested that the Methodology Commitee ofthe Commission conduct apre-auit survey to obizn abasic understanding ofthe deb and the legal norms applicable to Puerto Rico's debt. The Commission also asked ito prove a factual bass for continued study. The seope ofthis pre-audit report was limited toa review of documentation ‘produced by the Goversment Development Bank associated withthe two most recent fll {ai and credit debt issues of the Commonweakh; thse being the 2014 $35 bilion general obligation bond offering and the 2015 issue of ax and revenue anticipation notes, 188 well as associated independent economic, legal nd accounting research Thereview vas limited du othe fact that the Commission has yet to receive funds to commence is work. ‘As areslt ofthis research, the Commission has decided to further study the following questions: Ll Rico violated the con blanced budoetrecuirement by using debt to finance deficits? Puerto Rico issued the 2014 GO bonds in order to finance prior deficits Pero Rico's Constitution requires thatthe Commonwealth maintain balanced budget, and thus prohibits the goverment from borowing to cover budget deficits, Nonetheless, Puerto Rico has borrowed over $30 billion to finance deficits. Puerto Rico hasbeen boerowing to cover deficits since as eatly as 1979. If Poerio Rico financed defi despite being strictly prohibited from doing so by its own Constitution, then a court may rule that Puerto Rico borrowed without authorization odo so, withthe consequence that Puerto Rico may be barred from issuing further debt in the future to finance deficits, it ‘may be forced to raise taxes oratemtively, declare the debt unpayable for lack of authorization, 2. Has Puerto Rico violated the consitional debt init? Puerto Rico is spending anywhere bbenween 14% and 25% of intemal revenues on debs. Puerto Rico's Constitaon tits that, Puerto Rico eannor takeout any det that Would make i spend mor than 15% of intemal revenues ints Treasury on General Obligation deb. Ifthe audit dermonsiraes tht Puerto Rio has been spending more than 15% of internal revenues on debt, then court could, under US. Supreme Court case precedent, rule thatthe debt may not be payable. “The Commission will have to determine what debt counts toward tht limit, and which ‘debt doesnot, and then determine whether the Commonwealth went over that it,Page of 32 3. Docs Puerto Rico's use of “scoop and toss" violate the Ci 7 inst issu lasting, mose than 30 vears? The Commonsveath has ‘engaged in a long time pattem of "scoop and toss.” That means anytime a debt is sous to come duc, rather than pay it, the Commonwealth took out another loan and refinanced the debt. For example, the 2014 deb repaid a debt from 2003, but that was refinancing a debt from 1987, The Constitution explicitly states that Puerto Rico ‘cannot issue any loans for more than 30 years. While this practice may not be fiscally ise the Commission will have to determine whether scooping and tossing debt violas the Constitutional prohibition, 44, What effect did the Commonwealth's use of Capital Aporeciation Bondshav {ol debi amount? Puerto Rico has approximately $37 billion in Capitel ‘Appreciation Bonds (CAB's) outstanding, of which approximately $23 billion belong to COFINA.CABs are an unusual type of debt in which the borrower does not pay {interest or principal until the bond comes due. Interest continues to acerue even though the borrower does not have to pay until the debt iedlue. In Puerta Rico's ease, one of the bonds thatthe Commonwealth must pay on July 1, 2016 isa CAB isued in 1998 for $14 million, and thatthe Commonwealth must now pay $38 million on, after _adaing interest payments 5. Did tie Commonwealth, and or its advisors and underwriters, comply with relevant ‘SEC lows concerning disclosure? SEC Rule 15 c2-12 bars underwriters from selling debt unless they have determined that the issuer wil provide to the Municipal Securities Rulemaking Board ("MSRB") anaual financial ststements or audited Financials ina timely manner. The Commonwealth issued the 2014 GO bond on March 17, 2014. However, only six weeks later, on April 30.2014, the Commonwealth filed a notice that it would mis its continuing disclosure obligation to provide its FY 2013 audited financfal, Furthermore, the 2014 bond offering says very little about the fact that Puerto Rico's Constitution prohibits using debt to cover Aeficis. The Commission plans on investigating whether the underwriters, which lsed the proceeds from the debt to retire some ofits holdings, knew, or should have know, thatthe Commonwealth would not meet its continuing disclosure requirements six weeks later ‘6 ALwhat point did the debt stop being (ive and contributing to econamie rout? Puerto Rico has a debt to GDP ratio of 96%, Economic literature suggests ‘hat borrowing is correlate to possible negative ecanomie growth once the GDP to debt ratio goes over 90%, The Commonwealth has increased debt usage in recent ‘years, but has filed to realize any sustained economic growth in that period. AS ‘efi increased the amount of “unproductive debt,” debt used to finance deficits iereaied andthe amount of productive debt decreased. The Commission plans to study the economie impact of Puerto Rico's deb issuancesPage 0132 TABLE OF CONTENTS Purpose of the Report s ‘Debt Compliance Evaluative Criteria 6 Part: Trends and Zlements of Commonwelth Deb. 8 Part a, Overview of 2014 GO Bond Offering 10 Discussion. a Part Ib, Overview of 2015 Trans Offering. Is Par Items of Concern emanating from te pre-audit survey so 7 4. Useof debt fardefict nancing. 0 1. Conformity wih consitutional imitations onthe maximum duration of long-term det issued..18 ©. Compliance with Federal continuing ditlosuefequitement, econ 19 44. Compliance with Consiusiona intations of the amount of annual deb service in lation to intemal Commonwealth events. ee 20 @. Ezonomic iglcains, Part l- Lega Implations. 2, Defic Finan nn sn 23 b. 30 Year Limiton Marty of Noe. Disclose tse, one Debt Limit n Next Steps. 31 Conelusion and Recommendations. soo 32Page 5 of 32 Puerto Rico Commission or the Comprehensive Audit ofthe Public Credit Pre-audit Survey Report! Perpose of the Report ‘The Commission forthe Comprehensive Audit ofthe Public Credit of Puerto Rie (“Commission”) was formed pursuant to Law 97 of 2015 of the Commonwealth ofthe Government of Puerto Rico (“Commonwealth”). The Commission is comprised of 17 members selected from civil society stakeholders including elected officials, representatives of financial institutions and credit unions, academics, and organized labor, The members work in cammittes that ae formed fFom time to time for specific purposes. ‘The Commission ereated the Methodology and Planning Committe with he goa of sing the Commision in the establishment ofits formal audit process. Accordingly the rodology and Planning Commitee conducted this pre-audit survey inorder to oblaina basic understanding ofthe Commonwealth's use of bonded indebtedness, and private placement of cts, to finance government operations and capital improvements While the Commission has decided to conduct the audit in accordance with U.S. General ‘Accounting Audi Standards, this pre-audit survey report does not purport to nor i it intended to comply with those standards. Instead this epor is prepared solely forthe purpose of focilitating ant expediting the audit planing efforts. ‘The seope ofthe present pre aut survey report was limited to review of documentation produced by the Government Development Bank associated with the two most recent fll th an credit debt issues ofthe Commonwealth; those being the 2014 $3.5 billion general otligation ‘bond offing tothe public and the 2015 issue of tax and revenue anticipation notes that were privately placed (-IKANS ‘This imitation upon the research efforts during this pre-auit survey was due to practical considerations ofiming and budget. The Commission has yet to attain the funding necessary to ‘The Methodology Commitee consis of profession] eanomin and accountants. They wer assed by ‘voles ssciated with varions Commissioner, neluing «CPA wih over 30 yer expeienc in prong publi sector aia experienced counsel. The documents reviewed ae smal in EAD AL ed 4, ‘Adionally, te ea reviewed eran documents soca wth th termination fern ners fa Ses ted ‘sin 2014 GO Offing. Members of te Methodology Commie sss reviened clean economic erate, ‘estrched relent ce law, and i ait review of rir yet budget tnd deb at was efiauned Uy he 2014offering In doing tbe Cormision memes sen spotty ovr 425 hots of poesia tne ding the retearch and wri this epor, Using pc legal accoutag,d reserch ltd profesional alsa Peto Rico, which re wel teow matalan poessionl frm atest repr wold have cos $63.70, Using erage ‘anand egal ates ra lawyer of sila experince ad verage nesting ree ors CPApret manner and "esearch nals of ilar experience the rate comes a $135,009,Page Gof 2 initiate an audit that is comprehensive in scope; yet the Commission has a mandate to provide the legislature with periodie status reports? The present part aims to Fulfil this mandate, In addition, dhe Methodology and Planing Commince hopes and expects this first pre- audit survey report can serve to create a consensus amongst Commission members regarding the following project management issues: ‘+ Audit scopeand objectives ‘Timing and budget Audit team erga ion and resource acquisition ‘This pre-audit survey report consists of thre elements ‘A high leve profile ofthe Commonwealth's debt curently outstanding as represented in the Commonwealth’ bond offering documents, and audited financial statements, ‘+ An itemization of concerns that have arisen during the pre-audt survey and specifically reviewingthe 2014 and 2015 debentures, and ‘+ A series of recommendations for moving forward on a comprehensive Financial and ‘compliance sud ofthe Commonwealth's deb as prescribed in the Commission's charter law, Debt Compliance Evaluative Criteria ‘The Methodclogy and Planning Committee understands the following Puerto Rican constitutional provisional apply to debt financing. 1) Article Vi, Sec. 7 ofthe Commonvveath's Constitution states that “the appropriations ‘made for any fiscal year shell not exceed the total revenues, including avaiable surplus, estimated for said fiscal Year unless the imposition of taxes suficient to ‘cover said appropriations is provided by law.” This provision explicitly prohibits ‘budget deficits. However, our initial review ofthe 2014 GO Bond Offering suggests that the Goverment of Puerto Rico engaged in borrowing to cover deficits practice ‘known as“defiit financing’. For example, on page 8 ofthe 2014 GO Bond Offering Statement the Commonwealth admits that it has been borrowing fo cover deficits for ‘years. According o ou Initial estimates, the Commonwealth and its instrumentalties may have borrowed up to $30 billion in recent years to fund deficits, and has been ‘engaging in deficit financing since as early as 1979, if not possibly earlier. 2) Antcle Vi, Sec.2 of the Commonweslth Constitution states ..and no such bonds or ‘notes issued by the Commonwealth for any purpose other than housing facilites shall ‘Art 2, See. 3 of Law 9702015 reaues hat he Commision ise a preliminary repo six months fe the ‘pase ofthe Lav. Delain Commision formation and eh farts eect reclded te Commie fom fasting it we unl eay 2016Page 70f 32 ‘mature later than 30 years from ther date and no bonds or notes issued for housing facilities shall mature later than 40 yeas from their dae..." This provision prohibits incurring debts with ever longer maturity dates. While the 2014 GO debt offering included bonds that mature in less than 30 yeas, the procecds fom the 2014 GO debt offering were used to refund a deb that was issued in 2003 by the Puerto Rico ‘Commonwealthas a public improvement bond; which in tn had been used to refinance a Capial Appreciation Bond ("CAB") that was originally issued in 1987, Assuming Puerto Rico pays of this bond on time, it will have paid off the 1987 CAB Jn 2035, almost 50 years from the date the debt was frst issued. Capital appreciation Bond-Abond inwhich the Borrower pays seerved interest andthe entire amount outstanding at maturity. 3) Antcle VI, Sec. 2 of the Constitution states that it shall not have direct obligations that “shall exceed 15% of the average ofthe total amount of the anual revenues raised under the provisions of Commonvsealth legislation and covered into the ‘Treasury of Puerto Rico in the two fiscal years next preceding the then current fiscal year.” Recently, the Governor of Puerto Rico issued Executive Order 2015-022, The Governor's order created a “Working Group forthe Fiscal and Economie Recovery of Puerto Rico” to work ona restructuring proposal. On page 17 ofits September 2015 ‘report, the group states that Puerto Rico will spend 42% ofits “tax backed” revenues fon debt in FY 2016, and that it will spend 359% of ts “tax backed” revenues in Fiscal ‘Year 2017 on debt service? Aside from the Constitutional issues expressed above, the Committe has also found ‘issues that warrant further investigation by the Commission, such a the roles of underwriters and other financial and legal institutions in issuing the 2014 debt. For example, SEC Rule 15 €2- |2 bars underwriters from selling debt unless it has determined tha the issuer will provide tothe Municipal Rulemaking Board *MSRB") annual financial statements or audited financials in a timely manner, The 2014 GO Offering closed March 17, 2014 However, only six wecks later, on April 30,2014, the Commonwealth filed a notice that ‘it would miss its continuing disclosure obligation to provide ts FY 2013 audited financials. The Commonvealth fled another notice on April 21, 2015 indicating that it would not meet its continuing disclosure requirement to provide continuing financials of 2013. ‘The Commonvseath eventually filed its FY 2013 financials, but i then missed its selFimposed ‘deadline of July 31, 2015 to file FY 2014 applicable financials. The Commission should investigate and determine whether the underwriter, which used the proceeds from the debt to retire some ofits holdings, knew, or should have know, that the Commonwealth would not a ocumets/Ponro omicrowihPa tp.Page Bota ‘meet its continuing disclosure requirements six weeks later. The Commission has requested information from the Government Development Bank related tothe underwriting ofthis bond in ‘order to determine whether the underwriters complied with this SEC requirement, and is awaiting response. ‘As aresult ofthe foregoing, the Methodology and Planning Commitee believes that there isa strong factual basis for the Commission to continue research into whether the Commonwealth complied with the Constitution in issuing its debt, and whether the underwriters ends and Elements of Commonvvealth Debt ‘As of June 32,2014 (the most recent date for which the Commonwealth Government has produced a financial report tha appears to conform to generally accepted governmental accounting principles) the Commonwealth Government and its component units were indebted to bondholders in exces of $72 billion ‘Three broad categories of debt exist. These categories and the approximate amount ‘outstanding as of Jute 30,2014, in the latest adite financials ae ‘+ Direct obligations of the Commonwealth and those subject to ful faith and ereit. guarantee ~ approximately $17 billion ‘+ Obligations for which payment is contingent upon appropriations from the Commonvealth ~ approximately $571,000,000 + Obligations issued by instrumentaliies ofthe Commonwealth which are backed not by a {guarantee ofthe Commonwealth's full faith and ereit but with a claim upon specified revenues collected by said instrumentality - Approximately $54 billion Since 2006 the total public debt ofthe Commonwealth Government has grown; apparently due tothe Commonwealth's need to provide essential public services inthe face of ‘contraction in the economy and a resultant decine in general and special purpose tax revenues point, in2003 the Commonwealth's total public sector debt amounted to just $29 billion, or lss than one half the current amounts. Additionally in 2003 total debt service ofthe primary govemment including the refunding of bonds previously issued) amounted to about SL. billion. By FY 2014 year end, this amount had grown to about $2.45 billion, According to the Commonwealth's unaudited financial statement attached with the 2014 GO Offering, the Commonveath hs attempted to reduce deficit spending, lowering deficits from $2,864 billion in FY 2009 0 $1.29billion in FY 2013.* The tue nature of the deficit will ave to be Based upon dscusions wih vrs representatives ofthe Commonwealth we understand he einanig debt Isbeen commonplace in ecent evs st ay of tipng mage the deco re General Fand anne to "Scop and tsPage 19 of 32 ‘Based upon conversations with a former director ofthe Office of Menagement and Budget itis our understanding thatthe refunding of bonds has been a standard prctice ofthe ‘Commonwealth as « means of balancing the General Fund budget since 2006, and that the ‘Commonwealth may have had budget deficit starting inthe late 1970's, In examining the 2014 General Obligation bond offering we obtained and revived the cpinions of bond counsel and ofthe Department of Justice. We also obtained and reviewed various certifications provided by Hacienda and the Government Development Bank which pertained to certain key compliance issues such a conformity with IRS Arbitrage rebate ‘egultions si Finiations on annual debt service. None of these documents we reviewed spoke directly tothe issue of whether refunding of bonds, much less the refunding of refunded bonds, was permissible ‘The economic substance of the Commonwealin's admittedly extensive use of bond Fefundings (as wel s the refunding of bonds previously refunded) is arguably tantamount to issuing debentures of unlimited duration. In examining the debt the Commission should look at the extent to which bonds were refunded, especially to less favorable terms forthe ‘Commonwealth Compliance with Federal continuing disclosure requirements. The 2014 Bond offering document acknowledges the Commonwealth's duty t conform {0 US Securities and Exchange Commission Rule ISe 2-12. In Puerio Rico's case, the ‘Commonwealth agreed to provide audited financial statements within 305 days ofthe end ofthe fiscal year. The 2014 Bond OS also contained an acknowledgement ofthe Commonwealth's repeated failure to achere tits continuing dislosure duties in recent years.” To rectify pas financial reporting lapses, the Commonwealth represented to have undertaken the following corrective aetions to ensure future compliance: (The assignment of additonal resources from local and national aut firms to those component units whose financial statements have not been provided in a timely ‘manner te the Commonwealth; Gi) The assignment of dedicated extemal and internal resources to assist the Central ‘Accounting Division at Hacienda inthe preparation of complex financial information that has historically delayed the audi (ii) Regular meetings between Hacienda and GDB personnel inorder to track the progress of all component unit financial statements and provide assistance, when necessary to ensure timely ling ofthe financial statements; > glory dbp cominsstas_ resources documents CommonsPRGO201sStiss4FianlOS PDE ap. 42.Page 200f 32 (iv) As necessary, regular meetings between Hacienda, GDB and component unit Personnel b ascertain progress and compliance withthe completion deadlines. ‘The Commonwealth failed, despite those efforts to ensure timely compliance, to produce timely financial reports in two consecutive years following the issue of the 2014 General Obligation bond offering. The 2014 GO Offering closed March 17, 2014. However only six ‘weeks later, on April 20, 2014, the Commonwealth filed a notice that it would mis its continuing disclosure obligation to provide its FY 2013 audited financials? The ‘Commonwealth eventsally filed its FY 2013 audited financials. However, the Commonwealth filed another notice on April 21, 2015 indicating that it would not meet its continuing disclosure requirement to provide continuing financials FY 2014.” The Commonwealth also missed its self-imposed deadline of July 31,2015 o file applicable financials. The Commonwealth also Filed another notice indicating that it missed yet another deadline to file ts continuing disclosure fon April 29,2016. 4. Compliance with Constitutional limitations of the amount of annual debt service in relation to internal Commonwealth revenues. Section 2 of Ancle VI of the Commonwealth Constitution provides that direct ‘obligations ofthe Commonwealth evidenced by full uth and credit bonds or notes shall not be ‘issued if the amount ofthe principal of, and interest on, such bonds and notes and om all such bonds and notes theretoore issued thats payable in any fiscal year, together with any amount Paid by the Commonwalth inthe fiscal year preceding the fiscal year of such proposed issuance ‘an account of bonds ornotes guaranteed by the Commonwealth, exceed 15% ofthe average annual revenues raisedunder the provisions of Commonwealth legislation and deposited into the ‘weasury (referred to asintermal revenues") inthe ue ies years preceding the fiscal year of such proposed issuance, Internal revenues consist of sles taxes (other than that pledged to COFINA), property taxes, income taxes and various miscellaneous sources of revenue. Inthe case ofthe 2014 offering intemal reventes amounted to approximately $8 billion thus providing fora maximum ebt sevice of about $2 billion (Our review ofthe 2014 GO Bond offering included an examination ofthe Government Development Bank's cenifiation of compliance with the constitutional imitation on a prospective basis, and in anticipation ofthe issuance ofan additional the $3.5 billion in fll eth and credit debentures to be issued, a pom. oryEP810191-£P627521-SPL02930 pat pena rsh orERBSTA29-ER6PI28 ER 1094855 pf pera st rEST85073-E861 735081015051 patPage 24 0f 32 ‘The computational methods used by GDB appeared tobe avthmetially correct, performed in a manner consistent with protocol employed in years past, and supported by the ‘opinion of outside bond cours However, certain rarsactions of esonomic substance appear to have been excluded from consideration in the 2014 offering. Asa casein point, we noted that the FY 2014 draft financial Siatements included recognt on ofa lability under guaranteed deb in the amount of $224 rillion. Since this $224 milion liability was not identified on the Commonvealth’s FY 2013 audited financials i is presurably an expense that was incured contemporancously with the 2014 General Obligation Bond offering, Depending onthe timing of when that expense was incurred it should have been taken into account in the debt limit eleultion ‘The computation of margin of avaiable deb service computed after giving effect tothe $3.5 billion March 2014 general obligation bond offering was just $66 millon. Hence, had the $224 millon liability been included in the GDB's debt limit, the bond may not have been issued in compliance, depending on he timing ofthe $224 million expense. Additionally, during FY 2014 approximately $2 billion in General Fund expenditures, oF oughly 25% of internal revenues were expended forthe purpose of debt service. However only about $1.2 billion or about 1% of such expenditures were recognized for the purpose of certifying compliance with the Commonwealth's consittional deb iit. We note that in yeas past, the Commonwealth's independent auditors have consistently ‘opined thatthe Commonweath fas been in conformity with the debt limit. However, an opinion has yet to be rendered with respect to this issue in the audit for fiscal year ending June 30, 2014, ‘which isthe fiscal year in which the bond offering the Commission examined, wes issued.®" During this phase the Commission learned that the information used by GDB to prepare the debt certification comes fiom Haciends and the Office of Management and Budget ("OGP”). Henee, upon the initiation ofthe comprehensive audi, follow up inquires with those agencies, willbe necessary Its also important to rote thatthe deh limit is dificul to calculate becaute the ‘Commonwealth uses taxes to suppor the debt ofboth its “blended component units” and “discretely presented units," Blended component units are those units that, while legally are independent, meet certain blending criteria under government accounting rales. In the words of 5 Se satement oft poston aww sind ues prsisdstalvisafl unaudied Goan] snements ded 2 16 2016 dnt art see Inupsow tuciena obiero grsiesdeouvlestal uae Gancal siemens date 2 16.2016 Ont 5.2. we tps er oi ol aid Goal sued 2 16201Page 220f 32 the Government Accounting Stndards Boards (“GASB'), “some component unis, despite being legally separate fom the primary government, are so inerwined withthe primary goverment that they ae, in substance, the same asthe primary government and should be reported es part of the primary government. That, the component units balances and teansactions should be reported ina manner similar tothe balances and tanssetions ofthe primary government self ‘This method of inclusion is known as blending."™* The Commonwealth has several blended ‘component units including the >uerto Rico Infasicucture Financing Authority (“PRIFA"), the Puerto Rico Seles Tax Corporation (*COFINA"), and the Puerto Rico Building Authority (*PBA").” In this eas, the Canmission may want to examine whether the ineome and debt of various component units should have been counted in the deb imitcalelaton, or should continue to be excluded. ‘e Economie Implications ‘As noted inthe overview, the GDP to debt rato of Puerto Rico is curently at 96%. During Fiscal Year 2015, the ratio was 98%, however asa result of lack of further access to financial markets that ratio has fallen to 96.6%. At this poin, the debt appears unproductive, and used to maintain liquidity rather than generate new growth, Page 24 of te OS for the 2014 GO Offering, which contains the Use of Proceeds, makes clear thatthe offering is for refinancing the Government Development Bant, but its ot for new capital financing, This chan sets out clearly the ratio of productive debt to less productive debt. From that perspective, the debt appears to be unproductive because ‘obtained to improve capita, butto pay for normal operating costs no longer being st TIT- Legal Implications ‘The concems outlined above implicate a host of legal concerns. This section ofthe pre= uit survey is nt a fall survey or analysis of the laws that apply to Puerto Rico's deb, ors legal ‘opinion of any sort. Rather, this seetion provides an overview of some ofthe laws thatthe ‘Commission should test to detemnine compliance against, This discussion is meant to set out an ‘understanding of the legal consequences that come with falling to comply withthe relevant provisions in Puerto Rico's Constitution and certain securities laws. Ifthe Constitution of Puerto Rico doesnot authorize a deb issuane, then such an action would be ulra vires, or without authority, Per Law 97, the debt audit must examine debt that hasbeen issued over the last 30 years ‘The Supreme Court of Puerto Rio has made clear tat, shoulda contact be left null and void, 2 prorat gemma stim hore jen pushesichuli lsd uoudied Goan! ements died 2 16 200 ape.Page 23 0f 32 ‘hat contract is ot subject oa statute of limitations defense, In other words, the Supreme Court ‘of Puerto Rico could hold that a debt that was issued 30 years ago could beset aside as being ‘unpayable because the statute of limitations does not apply o publi or private contacts that are nolo ab initio since they were without legal effet inthe frst instance. See Rios v, Municipio de Santa abela, 159 D.P.R. at 849 (holding that actions to set aside public contracts as nolo ab ‘nito are not subject o statute of limitations); se alzo Guzman Rodrisusz v. Guzmin Rodriguez, 78 D.P.R. 673 (P-R. 1955) (holding that the statue of limitations only limits suits on Private voidable contracts, not contacts that nolo ab initio). ‘The Commission, and its intemal audit team once funded, mus test compliance, and whether the Commonwealth acted without authority in issuing certain debt. The four points of | concer set out sbove where a) deficit financing, b) the prohibition on notes maturing 30 years or ‘more past issue dat, c) meeting continuing disclosure obligations, and d) debt limit compliance. ‘They will be reviewed in order. a Deficit Financing Amicle VI, See, 7 sates: ‘The appropriations made for any fiscal year shall not exceed the total revenues, including available surplus, estimated for sad fiscal Year unless the imposition of ‘txes suicient to cover said appropriations is provided by la, ‘This antele is commonly known as a balanced budget clause, The Supreme Court of | Puerto Rico has never ruled onthe meaning ot applicability ofthis section, Similarly it does not appear as if the Secretary of Justice ha provided an opinion concerning whether this provision prohibits the Commonvealth from taking out debt to pay for appropriations "Nonetheless, courts in two states have dealt with the effect of balance budget laws squarely, New Jersey and Pennsylvania. In Lance v, MeGreevew, 180 NJ. $90 (2004), the Supreme Court of New Jersey held that borrowed funds didnot constitute revenue within the meaning of the State Consttution’s requirement ofa balanced budget. Therefore, the court ssid, the funds could not be used to pay general operating expenses, elthough the state may continue to borrow fr capital projects. Because the court was ruling forthe frst time on the meaning of the word “revenve,” it said its desison would apply ony to future budgets. Similarly, in Hopewell Schoo! District, 59 Pa. D. & C249 (Pa. Ct. Common Pleas 1987), the court ejected a petition fled, atthe request ofthe professional employees of the sltrct, seeking a declaratory decree on whether the professional employee were entitled to an increase in ther salary due tothe high cos of living. Inthe alternative, the school distiet sought «declaration of whether the high cost of living was an emergeney within the meaning of section 563 ofthe School Code of May 18, 1911. The court found that ifthe school district increased the salary of the professional employees, the increase would cause the total appropriations containedPage 240132 in the budget forthe curent fiscal year to be exceeded. The court stated that the schoo! district ‘could not grant the increase in salary because it was contrary to te statute, The cout stated that there was no authority forthe schoo! district to make any additonal appropriations because there ‘was no anticipated revenue fom any source that could be floated to raise revenue for such a purpose. Furthermore, the court stated thatthe present high costo living was not an emergency. Even though the case didnot deal directly with the implications ofa balanced budget amendment, it did make clea that district could not float any more debt through a temporary loan or move appropriations around when the statute required a balanced budget. “There isa dearth of ease law regarding the substance ofthis issue because courts have applied a numberof decision avoidance mechanisms to avoid reaching a decision on the merits Furthermore, states have used a numberof budget gimmicks to et around their balanced budget amendments.” Nonetheless,the Commission neds to Further investigate whether Puerto Rico used deficit financing ina wey that violated is balanced budget amendment, and ifthe ‘Commission did do so, then the Commission needs to examine with precision how much of the debt was taken to finance deficits, andior how much the Commonwealth would have had to increase taxes to balance the audget. . 30 Year Limit on Maturity of Notes Aricle VI, See. 2 of he Commonwealth Constitution states ...and no such bonds oF note issued by the Commonwealth for any purpose athe than heusing facilities shall mature later than 30 years from thei date and no bonds or notes issued for housing facilites shall ‘mature later than 40 yeas fom their date..." Puerto Rico's Supreme Court has nt issued a ruling on ths issue, nor has the Secretary of Justice published any opinion regarding whether the rollover of maturing debt violtes the Constitution. Interestingly enough, «fty-state Lexis search regarding this issue tumed up no case law on the matter, atleast as applied to municipal ‘The Constitution of Puerto Rico seems pretty cleat regarding this point The ‘Commonwealth cannot issue public debt, as defined by the Consitation, with a maturity of more than 30 yeas, unless itis for fnancing the construction of housing, (Once the Commission hires legal counsel, they will need to develop an interpretation of this section ofthe Constitution, despite the paucity of law on this point, in order forthe auditors ‘test compliance with this provision. The Wall St. Journal noted that Puerto Rico and Chicago are avid uses of “scoop and ts, the practice of refinancing maturing debt with new debt." ‘The question forthe aut team to resolve is whether this practice violated te letter ofthe Constitution, or simply the sprit ofthe Constitution, and to determine how much debt did this, practice add tothe foal debt load the Commonvvealth curently ha, * Ses aznraly, Cush Of Salt: How inleentne ssi changes sate anced ude mendes ne ical esoonh "S6B.C- Lo Rev 381 C013) "hg coats $6100 4240570230457 4057935444 [TSRBOM,cted Dec 2 303,Page 25 of 32 ‘The audit eam will most definitely work with appropriate legal counsel to resolve this issue as the Committe learned that some of Puerto Rico's debt consists of CABS that mature ell over 30 years afer issuance and in some cases almost $0 years after issuance." In fact, as ‘noted in Exhibit B to this report, the Commonwealth may have upto $38 billion dollars futstanding as CABs, and no idea how thats included in the Commonwealth's pro-orma debt report. This report mentions the CABs here because the proceeds from the 2014 GO offering ‘were used to refund a debt offering thet was issued in 2003, and that had refinanced a Capital Appreciation Bond (“CAB”) that was originally issued in 1987, Assuming Puerto Rico pays off this bond on time, it will have paid off the 1987 CAB. in 2035, almost 5O years from the date the debt was ist issued © Disclosure Issues In general, underwriters have to undertake certain obligations related tothe marketing of| the 2014 GO offering. It is worth quoting Securities and Exchange Commission Rule 15 ¢2-12, codified as 17 CFR. 240.15e2-12 t length (@) As a means reasonably designed to prevent Fraudulent, deceptive, or ipulative acts or practices it shall be unlawful for any broker, dealer, oF ‘municipal ecutites dealer (a “Participating Underwriter” when used in connection with an Offering) to act as an undersier ina primary offering of ‘municipal securities with an aggregate principal amount of $1,000,000 or ‘more (an “Offering”) unless the Participating Underwriter complies withthe -ments ofthis section or is exempted from the provisions of this mrsn, Participating Underveriter shall not purchase or sell municipal securities in connection with an Offering unless the Participating Underwriter has reasonably determined that an issuer of municipal securities, oF ‘obligated person for whom finaneal ar operating data is presented inthe Final official statement has undertaken, either individually or in combination wth other issuers of such municipal securities or obligated Persons, in a waitten agreement or contract fr the benefit of holders of such securities, to provide the following to the Municipal Securities Rulemaking Board in an electronic format as prescribed by the Municipal Securities Rulemaking Board ether direstly or indiretly through an indenture trustee ora designated agent: ‘Sex Esti ummary fal Capa Appreciation Bonds ten ou by te Commonweal, ~ haps corel elena FeO ScPage 260832 (A) Annual finanal information for each obligated person for whom financial information or operating data is presented in the final oficial statement, or, foreach ‘obligated person meeting the objective criteria specified inthe undertaking end used to select the obligated persons for whom financial information or operating data is presented inthe fnal oficial statement, except that, in the ease of pooled obligations, the undertaking sall specify such objective erteia; (B) If not submited as part ofthe annual financial information, then when and if availabe, audited financial statements foreach obligated person covered by paragraph (6)(S\MA) ofthis section. “Taken together, these rules bar municipal underwriters from selling bonds unless they ean ‘reasonably ascertain tht municipal issuers can actually comply with their continuing disclosure obligations. The obligation determine whether an issuer will reasonably meet its continuing obligation disclosure atthe time of issuance rests on the underwrite, though an agent acting on behalf ofan issuer may, by contrat be responsible for providing the disclosure tothe market 5 the Commission will have to review the documents provided tothe underwriters to ifthey reasonably investigated the ability ofthe Commonwealth to make its continuing disclosure obligatons. Since the Commission has no received those documents yet from the GDB, iis too premature to artive at any opinion. While the SEC placescerain obligations on the underwriter, issuers are not ebsolved from all esponsibility undercurrent SEC law. Even though municipal issuers like Puerto Rico are exempied from many SEC requirements, municipal issues are subject to the antifaud provisions of section 10(b) ofthe Exchange Act, and Rule 106-5, Rule 10b-S makes clear ‘hati is unlawul for any peron to defraud or make untrue statements, or omit material fats. In appropriate circumstances, and usually upon complaint, the SEC will investigate a municipal issuer's Offering Statements 1 determine if the issuer was acting in false and misleading ‘manner. The SEC’s enforcement actions against Miami and Greater Wenatchee Regional Events Center ae illustrative In City of Miami, Horida ‘the SEC issued a cease-and-desist order against the City of ‘Miami for preparing offical satements which contained false financial information about the city’s actual finances at the tine ofthe bond sales. Specially, the SEC faulted Miami for ‘including a summary of finances that demonstrated thatthe city's budget was balanced, even ‘hough inthe next fiscal year he city’s operating budget exceed the budgeted operating revenues by millions of dollars. The SEC also found that Miami's use of bond proceeds to fund 5 tpn orpacketTraspaceey Coninving Disease asp 4 Se itn col iseadstewiS 7, 15 US.C See 78, ‘Sea a gun edalttexV 72401085, 17 CER, Se, 240.106 Se pants stn uininns3$213 iPage 27 of 32 ‘operational expenses demonstrated the gravity ofits cashflow deficit. As a result the SEC felt that the City nesded to make these Facts cles to investors In Greater Wenatchee Regional Events Center Public Facilities Distriet et al the SEC held that the Official Statement of bonds that were going tobe used to purchase a hockey rink mislead investors because the projections contained were too optimistic. Specfially, the SEC found tha the Mayor and developer went out of theie way to reject the more sober essessment of Potential ticket venue put forth by an independent consultant. Furthermore, the Commission felt thatthe City of Wenatchee, WA’s ability to suppor the bonds was limited by its own debt load:* Inthe ease of Puerto Rico, the Audit Commission will have to study whether Puerto Rico's disclosures concerning its debt suficed to meet relevant SEC standards, and whether its underwriters met their disclosure obtigatons. While a violation ofthese standards would not necessarily render any prior deb issuances ulra-vires, the market may want to have the Commission take an independent look atthe adequacy ofthe disclosures put out by Puerto Rico, and the underwriters selling its debt. 4, Debt Limit ‘IF the aut concludes that Puerto Rico issued debt over and above its debt limit, sucha finding could have significant legal implications. The Supreme Court of the United tates hes ‘held that a government that exceeds its debt limit can repudiate debt that is above its legal browsing limit. In Buchanan v, City of Litchfield, 102 U.S. 278, (1880)” the Cty of Litchfield L borrowed money to fund set of water works, The city did so even though it had already reached he limit set out under Ilinois la. The lender brought suit seeking repayment afer the city refsed to pay. The United States Supreme Court held that the plintifFcould not recover against the city because the contract Was Void as the city didnot have the legal authority to issue the debt 1d. at 292. Infact, five years late, the Supreme Court once again rejected the plaints attempt to recover for his loss, ths time by seeking to take control of the waterworks thatthe plaintiff's funds were used to purchase. See Cty of Litchfield v. Ballou, 114 U.S. 190, i335)" The Litchfield case isnot the only casein which this result has been reached. Other cases have also invalidated debt that exceeded the deb limit established by a governmental entity. For ‘example, in Eston v, Shiawassee County, 218 F, $88, 592-93 (6th Cir. Mich. 1914), +e Sixth CCireuit held thata debt a bondholder made to @ county in excess of borrowing limits set out by the state of Michigan was null and unenforceable. Alabama's courts have also voided debt thet ‘See psc gaton Sdn 20133-9471 See sine tina fens 1022 7 Se pa cone, ed soeenscoureU L490.Page 28 of32 was taken out against its debt limit. See e.g. Eagerton v. Second Econ, Dev, Coop. Dist, 909 So. 24 783, 796 (Als, 2005) (taxpayer brought successful suit voiding debt taken out in excess of Alabama constitional debt limit). In one case, the Supreme Court of Nevada held thatthe state hha invalidly classified certain bonds as being exempt from the constitutional debt lint, anv! ‘eld that if certain bonds to build a cultural center were issued, the amount would have to comply withthe Nevada eonsitution’s deb limit. See Brewery Cultural Arts Centr. State Board of Examiners, 108 Nev. 1050, 1056 (Nev. 1992): see alo Ferra v. Britton Independent School District. 72 8.D. 226,234 (S.D. 1948) (enjoining sale of bonds by taxpayer besause issuance would have violated the debt limi), (Other cours have also held that one cannot recover on a contract what state statue has already deemed void. See e.. Zane v, Hamilton County, 189 USS. 370, 381-82 (1903) (holding ‘that bonds that had been invalidated by state statute not subject to recovery); Lewis v, Pima ‘County, 155 U.S. 54, 57-58 (1890) (holding that county's bonds issued for benefit of wlroad not recoverable wher issued against state law debt authorization); Revnolds v, Waterville, 92 Me, 292, 312-313 (Me, 1898) (invalidating contract over Maine deb limit fr cities). One important exercise thatthe Commission wil have to undertake is determining ‘whether a bond is truly a GO bond, a revenue bond, or a moral bond, as different legal regimes apply to each. Ir determining which debt is GO debr, and which should not be, some courts have looked behind th labels given to the debt by issuers. A handful of state courts have given rear weight to practical effects in assessing whether an abligatin is “debt” within the meaning ofa sat’s constitution. See State ex rel Ohio Funds Memt, Bd. v, Walker, 61 N.E.24 927, 932 (Ohio 1990) (noting obligation to be considered "not only for what it purports to be, but ‘what it actually i"); Winkler v, Sch, Blda, Auth, 434 S.E.2d 420, 433, 435 (W. Va. 1993) (noting that the ourt was un-willing to “abandon ... gic and common sense” and Finding that ‘where the only source of funds for revenue bonds was genera appropriation, it defied logic to say that the legislature had no obligation to fund such bonds.") ‘This approach was also used in Detroit to a certain extent, and it bears retelling, On January 31,2014, the City of Detroit brought suit against the Detoit General Retiement Corporation and the Detroit Retirement Systems Funding Trust 2005 and 2006 seekingto invalidate about $1. billion in debt." AL that time, the City of Detroit retirement systems for both its employees and public safety officers (collectively “retirement plans”) had threstened to file lawsuit against the City of Detroit for filing to adequately fund them, Deteoit could not ‘make the payments because it lacked the S17 billion needed todo so = iin ti i nips ike te com Tenpaesmeda es Service 20Pape Cy 20oI%20DeroWi20COP 20H ode ‘Complsin20fr20Declaraoy%20and2OljunivecORelie 20h Ian, M203 Pe2CaI ‘thesis polage 29 of 32 Detroit could not borrow any more money either, Under the Michigan Home Rule City ‘Act ("HRCA"), MCLA § 117.4a, the maximum indebtedness a city could ineur was the greater of (1) ten percent of the assessed value of al eal and personal property inthe city; o (2) fifteen Percent ofthe assessed value ofall the real and personal property inthe city if that portion of the ‘otal amount of indebtedness incurred which exceeded ten percent was o had been used solely for the construction or renovation of hospital facilites, The Constitution of Puerto Rico cantaing sinilarlanauage for its municipalities. Sce An. VI, Sec. 2. According to Detroit's Finance Department, the City only had $600 million remaining under its debt limit as of May 2, 2005 This fact was made known publicly. Since Detroit could not isue traditional bonds without going over the debt limit, the City insead embarked on building a creative financing mechanism to get around the debt limit ‘Spzifically the City created two shel entities called “Service Corporations.” The board of irectrs of the Service Corporations consisted of City of Detroit officials. The Service Corporations then established a special trust to sll “Cenficates of Participation” (“COPYs) to investors in the market instead of bonds. The COP's represented an undivided proportionate interest in the funding trusts right to receive payments from the City of Detroit under the Seevice Contract? ‘The Service Corporations and trusts were then required to remit the proceeds from the sale of COP'S tothe retirement systems. The Service Corporations would also pay the trust, ‘money to service the interes and principal of the COP's under a service contrat withthe City of| Deroit. The City claimed, pursuant to advice of couneel, thatthe payments it made tothe Service Corporations were contractual obligations, and not deb as defined under the HRCA. Honever, the Service Corporations ireevocably transferred their right to receive payments from ‘heCity othe tut, and the rust would then pay back the COP's to investors and ceased to be anything more than a shell entity. The trusts, with U.S. Bank as Trustee, would continue service the COP's. Asa result ofthe above, the City of Desoit sought a declaration seeking to invalidate the $1.45 billion debt for violating the Home Rule City Act. The City argued thatthe Service Contractors were sham entities created forthe purposes of evading the debt limit contained inthe Hore Rule City Act, and thatthe contracts were void ab initio. ‘The defendants sought to dismiss the suit onthe basis thatthe City of Detroit lacked ‘starding because the City was essentially suing itslF and that thee was no case or conteoversy at ey ow ice Cots sod sinPage 300132 play: Shortly afterthe suit was fled, many ereditors and bond insuters sought to intervene it the proceedings because they would los significant money’if the debt was set aside as illegal ‘The judge refused to dismiss the awsut!* The judge frst held that the City properly alleged thatthe COP's created a real financial obligation forthe City, and that there was areal slspute between the parties. The judge also found thatthe City was not suing itself, but a third party with interests adverse to the City. The judge also grated te creditors’ motion to intervene with the limitation thatthe Interveners could not fle third party complaint or counterclaim against anyone else. See In re City of Detroit, 13-53846, Adv. Pro. No, 14-041 12-SWR (Bankr. ED. Mich, June 30, 2014)(Decision by J. Rhodes) ‘The defendans inthe Detroit case raised the following defenses: 1, The suit was brought too long afer the debt was incurred under the statute of Aitations. 2. The Ciy of Detroit already had the benefit of using the funds and it would be unfair allow them to not to pay ther back, 3. ‘The City represented to investors it had the legal authority to issue COP's and irurmvent the debt iit. The third party intervening creditors brought forward the following counterclaims: |. They sought a declaration holding that setting aside the debt would violate the Contracts Clause ofthe U.S. Constitution. ‘The Ciy fraudulently induced investors into buying COP". 3. The Cy was unjustly enriched by the sale ofthe COP's.”” raion Motion o Dismiss Ani 0.2014, pw ikebide con Tenplatesinediaies/ Service 20Pape Cinta. 20Detie2OCOP.A.20elde ‘sServce20Corpraion %20Moton2a%20Diemie"20Conpinns1.20datedsc0 ApriM20108 205.20 taper BS Onion and Maton Series vi june 0201e priv ike om Tempinemeti explication 2014 Opie ingao orion 2o%20Dismss2067420Seree.20Corpns2and 0 lmervene C320) useOOS0¥ACIAEDD Tp Tinie forthe Two Fusing Insts Macs 17.2012 po. dnkerbie con Templatemeinfiles/Servicei20Pape Cyto? 20Deuie2OCOPH20SISe /Answe20Wtt20AFmaetlDefenes20anh20Couniecnins PF i ion older ia interven, dated 3.172014 ot pti. dined com Templates media eeServce20Pages iy 200 20D-teiP-2UCOPH OHI ‘/Maionts20oPsn0Cenainhi20COP AMEE 2% Daten CARD. HOtePOMaaSd| Te cvamo14 POF 2 0uns200nder20(1)4200eny 20Graning?c0Mounes 20Page 21 of 32 ‘As the froceedings continued, the ereditors brought forth many claims fr why the COP debt is enforeesble asa matter of law. While the judge never explicitly ruled on these issues, both parties briefed these matters fully and such briefing is believed to have played role inthe judge's refusal o accep final settlement of Detroit's debt on two different ossstons, finding ‘on both occasions that the creditors were seeking too much given the weakness of thet claims. Inthe end, Detroit sought to invalidate $1.45 billion in COP’s, and succeeded in having the court invalidate 87% of the deb that was oustanding on the COP’s. In approving the settlement, the judge noted that the outcome ofthe litigation would have been unclear. "Nonetheless, stated that the City of Detroit's argument tha the deal violated the debt limit had “substantial merit” and thatthe suit would have had a “reasonable likeihoad of sucess, See In se City of Dect 524 B.R. 147, 193, 13-53846 (Bankr. E.D. Mich, Dec. 31 2014) (Supplemental Opinion Regarding Plan Confirmation, Approving Settlements, ané Approving Exit Financing), He noted that since the Service Corporations did net render any real services to the City, the City ated as the ultimate payor onthe COPY, He did note that there were several defenses and co:nterlaims that various partis could raise, but thatthe settlement was acceptable. tis the experience in Detroit, combined with the observations that were observed inthe finances of Puerto Rico that lad the Methodology and Planning Committe to recommend further investigation of this mater to the Commission. This means that the Government could act on the Findirgs ofthis Commission, should it Find thatthe Commonwealth's deb limits were Violated. The audit team will most definitely need a group of lawyers to help it resolve this issue ‘before the auditcan sta. In testing this hypothesis, the Commission would have to decide which debts includedtn it limit calculation, and which debt is nt in order to arcve atthe corret income numerator and denominator for calculating compliance with the 15% deb limit. Itis {important fr the Commission to obtain a thorough sense of how, and why, each debtor revenue stream was included inthe ealeulation ofthe debt iit Next Steps ‘There are two further inquires thatthe Audit Commission can undertake, First, the Audit Commission could continue examining the role which the certain parties ‘marketed, shaped or in any other way designed a secondary market for the 2014 GO bond offering; the Commonwealth's participation inthis process; and any accompanying representations nade to secondary market participants. For example, the SEC brought an «enforcement action against several broker dealer for improperly selling the 2014 GO bonds in ‘denominations of $5000 instead of $100,000, even though MSRB Rule G-15(P) and SectionPage S20f 32 1$B(@)(1) ofthe Securities Exchange Act of 1934 makes i ilegal to do so.** The sellers were Fined. This ruling indicates thatthe SEC found reason to believe thatthe broker-dealers it ‘monitors engaged in improper sales inthe secondary market. GDB management provided copies of some materials fr the 2014 GO bond offering, but 1ne glossary or explanation has been provided that would allow our volunters to ascertain the ‘meaning of the jargon employed in the marketing campaign for these bonds. Further study of| these materials would also require an examination ofthe Underwriters! communications with the ‘Commonwealth, Bond Counsel, Disclosure Counsel and Tax Counsel, as well as any other ‘material communication that would shed light on the intemal eontrols employed to ensure compliance with federal and Commonwealth laws and regulations, Second, the Commission should continue its work along the lines it started, by ‘examining debt from the most recent offerings to the oldest offering covered by Law 97. According to data availabie onthe GDB website, the next issuance for review would be #2013, offering ofthe Puerto Rico Elecric Power Authority (“PREPA") for $673,145,000 at 7%." CCanelusion and Recommendations As result of the following, the Methodology and Planning Committee recommends that the Commission hire stafFand obtain the Financial resources necessary to review the matters ‘ised in this pre-audit eport carefully, and in compliance with U.S. GAO audit standards. The Commission should also remember thatthe issues contained herein may not be the only issues, that arise; these are simply the ones the Methodology Committe identified in its review of limited portion of Puerto Rico's total outstanding debt haps sec gouNew/PresiteleneDetl reseRekse 370583350368, two gd pr com/ness resource documents 2013-0819-OSSereQO13-AAgosto2013.FINAL putExhibit A-1L 10. nL 1, LIST OF CLOSING DOCUMENTS, Six (6 copies of each item shouldbe prepared and forwarded to Greenberg Traurig, LLP that complete transcripts ean be made available tothe partis, CLOSING CERTIFICATES General Certae ofthe Seortary ofthe Treasury eating to: 'A. Authorization and Due Excouin of the Financing Documents B. Section (4X6) ofthe Purchase Conrct. C. Signature of the Bonds and No Litigation. D. Onder to Authenticate and Deliver the Bonds E, Apolcation of Proceeds. CConiate of Government Development Bank for Puo Rico (“GDB") regarding the resolution confining is recommendations 1 the Govemor and the Secretary a 1 the Setais of the Bonds (Cericate ofthe Acting President of ODB. Tncumbeny, Signatur and Seal Cetfiate of the Commonweal Officers and Seal Cerificate covering the members of the Board of Director of GDB. aad cerain officers of said Bank. Cenitied copy of Act No. 33 of the Legislative Assembly of Puerto Rico, approved December 7, 1942, asamended. Cenified copy of Act No. 242-2011 of the Legislative Assembly of Puerto Rico, approved December 13, 2011. Certified copy of ActNo. 45-2013 ofthe Legislative Assembly of Puerto Rico, approved Sune 30, 2013, Cerfied copy of Act No. 34-2014 ofthe Lepsltive Assembly of Puerto Rico, approved. March 4, 2014 Certificate of the Secretary of the Treasury as to the bortowing power of the Commonwealth undet Section 2of Article VI ofthe Constitution of the Commonwealth, Cerificate of the Secretary of State of Puerto Rico with regard to the rules covering the acceptance of collate securities to guarantee public funds.v 18 v. 2. 21 2. 23. 24, BANCO POPULAR DE PUERTO RICO Certificate ofthe Regist and Escrow Agent relating to |A, Acceptance tothe Seeretary of his appointment as Registrar and Escrow Ageat. 'B, Authentstion and Delivery ofthe Bonds. Execution, Aubentaton and Incambency Cerificate fhe Park FINANCING DOCUMENTS ‘The Bond Resolution ‘The Purchase Cont. |A, 152-12 Compliance Certificate. “The Escrow Deposit Agreement [A Lester of Instretions to Remarketing Ager. ‘THE BONDS Specimen Bonds Underwriters’ Receipt and Delivery Instructions. OFFERING DOCUMENTS Preliminary Official Statement, a8 Supplemented. cia Statement. Letters from Moods’s Investors Service, Inc. ("Moods's"), Standard & Poor's Rating Services ("S&P"), and Fitch, Inc. (Fitch) rating the Bonds Blue Sky Memoranda. Proof of filing of te Official Statement withthe Municipal Securities Rulemaking Board through the Electronic Municipal Market Access System. TAX MATTERS Asbitrage and Tax Cerificate of the Secretary ofthe Treasury ‘A, Centficat of Barclays Capital as to Purchase Price25, Form 8038-6. VIL. OPINIONS 26, Opinion ofthe Secretary of Justice of Puerto Rico approving the validity of the Bonds 27. Opinion of Greenberg Traurig, LLP approving the validity of the Bonds 28. Supplemental opinion of Greenberg Traurig, LLP, pursuant to Seetion (0X2) of the Purchase Contac. 29. Opinion of the Secretary of Justice of Puerto Rico, pursuant to Section 8(4)(3) of the Purchase Contract. 30. Opinion of Pietrantoni Mendez & Alvarez LLC, pursuant to Section 8(4)(4) of the Purchase Contec. 31. Opinion of O'Neill & Borges LLC, pursuant fo Section 8(4)(5) of the Purchase Contract. 32, Opinion of Sidley Austin LLP, pursuant to Section 8(4),5) ofthe Purchase Contract, VII. MISCELLANEOUS 33, ee 35. 36 37. Blanket lsuer DIC Letter of Representation. Closing Memorandum Notices of Redempticn. Swap Temnination Agreements Indenture of Trust regarding Redemption Fund A. Letierofasiracton re: Investment of Fund ‘Treasury - Secrtary of Teasary State» Secretary of State Justice» Secretary of Justice ‘GDB - Government Development Bank BPPR Banco Popular de Puen Rico GT Greenberg Traurig, PMA“ Parton Mens & Alves LLC ‘OB - O'Neill & Borges LLC ‘SA Sidley Austin LLP BC-- Barclays Capital IneExhibit A-2I. CERTAIN ACTIONS TAKEN PRIOR TO CLOSING ‘Among the actions taken by Government Development Bank prior to Closing were the following: October 9,2014 ‘The Board of Directors of Government Development Bunk adopted the Resolution, among other things, approving the delivery and issuance of the GDB Notes, approving the form of the Note Purchase and Loan Agreement and determining and providing for certain other matters in connection therewith, Ill, LIST OF CLOSING DOCUMENTS, ‘A, BASIC DOCUMENTS 1. Cenified copy ofthe Resolution 2. Certified copy ofthe Master Indenture 3, Executed copy of the Supplemental Indenture. 4. Executed copy ofthe Note Purchase and Loan Agreement. 5. Specimen copy of the GDB Notes. (0) B-IA Notes (b) BAB Notes, (©) B-2A Notes, (@) B2B Notes, 6. Executed copy ofthe Guaranty Agreement 1. (a) Executed copy ofthe Pledge Agreement () Acknowledgement of Commonwealth regarding Pledge Agreement, 8. Executed copy ofthe Note Fund Agreement, 9. Executed copy of the Commonwealth Covenant Agreement. 10, Executed copy ofthe Paying and Authenticating Agency Agreement (GDB Note) 11 Executed copy ofthe Paying Agency Agreement (TRANs Notes). 12, Tax Compliance Certificate, including the Lenders’ Certificates attached thereto 13, IRS Form 8038-G, B. CLOSING CERTIFICATES OF GOVERNMENT DEVELOPMENT BANK 14, Cetitied copy of Enabling Act16. re 18 2, Certified copy of By-Laws of Government Development Bank: (Officers and Seal Centifiate of Government Development Bank: Incumbency Certificate of Goverment Development Bank. Cerificate of Govemment Development Bank pursuant to Section 4.01(aviliXA) ofthe Note Purchase and Loan Agreement, Cerificate of Government Development Bank pursuant o Section 102 ofthe Master Indenture. Lester of Transmittal and Bank Order for Authentication and Delivery of the GDB Notes. Centitiate of Government Development Bank as to Applicaton of Proceeds of the GDB Notes. Government Development Bank's Liquidity Centifieate. €. CLOSING CERTIFICATES OF COMMONWEALTH. 2, m4 25, 26, nn. Certified copy of Guaramy Act. Ceniticale of the Sceretary pursuant to Section 2.01(c) of the Commonwealth ‘Covenant Agreement Incumbeney Certificate ofthe Commonvsalth, Cerificate of the Secretary of State of the Commonwealth of Puerto Rico with regard to the rules covering the acceptance of collateral securities to guarantee public Funds Commonwealth's Cash Flow Cenitiate, D. CLOSING CERTIFICATES OF TRUSTEE, PAYING AGENT AND. AUTHENTICATING AGENT 28 2, 30. Execution and Incumbency Cerificate of the Truss CCenitieate of Paying Agent and Authenticating Agent as to Execution, Incumbency and Other Matters Cenitiate of Authentication and Delivery. E, CLOSING CERTIFICATES OF ADMINISTRATIVE AGENT AND LENDERS. 31 2, Delivery Instructions ofthe Administrative Agent as to the GDB Notes. Lender Representation Letters.F. OPINIONS 33. Opinion of Squire Patton Boggs (US) LLP approving the validity of the GDB. Notes. 34, Opinions of Squire Patton Boggs (US) LLP pursuant to Sections 4.01(a)x (A) and 4.01(a)(ix)() ofthe Note Purchase and Loan Agreement. 35, Opinion of Pietrantoni Méndez & Alvarez LLC pursuant to Section 4.01(aXixXA) ‘of the Note Purchase and Loan Agreement. 36. Opinions ofthe Secretary of Justice, pursuant fo Section 4.01(a)(xXE) ofthe Note Purchase and Loan Agreement 37, Opinion of the General Counsel of Government Development Bank, pursuant to Sections 102, 303(d) and 903 ofthe Master Indenture. 6. DOCUMENTS RELATED TO TRANS NOTES 38. Certified copy of TRANS Act 39, Certified copy of Resolution No. 10469 adopted by the Board of Directors of Government Development Bank on October 9, 2014. 40. Certified copy ofthe TRANs Resolution 41, Executed copy ofthe TRANS Loan Agreement 42, Executed copy of TRANs Notes. (@) Bel TRANs Notes, (b) B-2 TRANS Notes. (©)C TRANS Notes. 43, Copy of cancelled Series A TRANs Notes H, MISCELLANEOUS 44, Evidence of long-term unenhanced debt rating ofthe Commonwealth 45, Blanket Isuet DTC Letter of Representations and Represertations for Rule 144A, Securities. 46, Closing Memorandum as to Flow of Funds 447, Morgan Stanley & Co. LLC Assignment with Voting Rights Documents (@) Canyon, (6) Sound Point CapitalExhibit BNICO 8 ASTWVLS NYOUON SaNOB ONAN AE ‘ONI00'F ASTAWIS NYOHOM _SGhOB ONION ‘NICO ASIWIS NVBYON SONOS ONION ‘ONIOO FARWISNVEHON Scho ONIONS ‘ON 00 ® ASTAWIS NYOUON SChO# OMIONNSL ‘NICO ¥ SAWS NYDEOM SNOB BNANNH DNIOD BARRIS NYOUOM NICO ® ABNVIS NVOUON SaNog Shinn ‘Saho8 ONIGNNB “BHO HLIMNOD Ha ON OO BASTNVISNVOHON SoNoH ONONASH “SB-B¥O HITMNOD Ud ANvaNo9 ¥ sHOVS WwRa09 ‘sana OMe Nao OWS7-HITAWOD Hd ‘Spud woReISeiddy jeydeg yNeEMUOWIIED BuIpUEIsINOsz0zsi080 ‘spuog uonefoaddy leudeo YNIa0O BupueISINO