Ruling unlikely to end Puerto Rico Oversight Board struggle with local government

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Puerto Rico bankruptcy judge Laura Taylor Swain's anticipated ruling on the relative powers of the Oversight Board and the local government is unlikely to end the battle for authority over the debt-burdened U.S. territory.

Swain will hear oral arguments Wednesday on an adversary complaint filed earlier this month in the Title II bankruptcy case by Gov. Ricardo Rosselló, in which he argued the local government can't be forced to follow parts of the board's fiscal plan that deal with policy. Governance issues are likely to remain whatever her ruling, observers said.

“Given the conflicts between the board, government, and legislature… the relationship will be very strained from now on,” said Puerto Rico attorney John Mudd. “The board motion to dismiss [the governor’s adversary complaint] essentially says that [the board] can impose via the fiscal plan whatever measures it sees fit. Governor wants to remain in control. Very problematic.”

Other Puerto Rico government sectors have followed the government in filing adversary complaints challenging the board’s power. On July 9 Puerto Rico Senate President Thomas Rivera Schatz and Puerto Rico House President Carlos Méndez Núñez filed a complaint similar to the governor’s. On Tuesday the biggest minority party in Puerto Rico, the Popular Democratic Party, said it planned to submit an adversary complaint on different grounds on the same day.

A Swain ruling for the board, which many observers expect, would leave the local government alienated from the board.

On the other hand, a Swain ruling for the governor, could lead either to Congress amending the Puerto Rico Oversight, Management, and Economic Stability Act or to the board’s end, said Advantage Business Consulting President Vicente Feliciano. Feliciano said the fact he wasn’t a lawyer limited his expertise on the topic.

“I expect Judge Swain to politely listen to arguments on July 25 and then say she has no jurisdiction to grant a remedy [to Rosselló],” Mudd wrote in his Control Board Watch blog. “If she grants any remedy, it is unlikely a confirmable Plan of Adjustment [for the debt] can be presented and Title III would have to be dismissed.”

In Rosselló’s adversary complaint against the board he asked Swain to declare the board’s fiscal plan and budget to be recommendations. He also sought an injunction from the judge preventing the board from enforcing parts of the board-approved budget that address public policy.

In response, the Puerto Rico Oversight Board on July 12 told Swain that it had broad authority over a wide range of policy issues. The board said that the Puerto Rico Oversight, Management, and Economic Stability Act, the board’s fiscal plans and budgets were legally binding on the local government and that under PROMESA section 201(b)(1)(K) the board can include a wide range of provisions in these plans.

“The board has made clear that it will vigorously defend itself against any suit attempting to thwart the board from carrying out its mandate under PROMESA,” said board executive director Natalie Jaresko. “This filing is a necessary step in that defense. Certifying and enforcing the fiscal plan and budget are the essential responsibilities and powers of the board. Protecting those responsibilities and powers is critical to the board being able to do what Congress asked it to do.”

“Adopting a recommendation in a fiscal plan takes it out of the universe of recommendations that can be rejected under PROMESA section 205,” the board’s lawyers said in their motion to dismiss the governor’s suit.

“In the same way a builder cannot omit or ignore key parts of a blueprint without risking the building collapsing, the governor cannot reject piecemeal aspects of the fiscal plan or deem them ‘optional’ without disrupting the carefully constructed balance of economic and fiscal measures designed to meet PROMESA’s objectives,” the board’s lawyers said.

In PROMESA Congress prevented challenges to the board’s certification determinations, the board argued. The act charged the board with finding a “method” to achieve fiscal responsibility, access the capital markets, ensure the funding of public services, and do several other important things. “To achieve these core tenets of the fiscal plan, the Oversight Board must have power to specify how that should be done.”

The governor filed a response objecting that the board was seeking “limitless” power over the government.

Observers said that they expected Swain to rule completely or largely with the board. PROMESA section 106(e) states, “There shall be no jurisdiction in any United States district court to review challenges to the Oversight Board’s certification’s determinations under this act.”

Mudd told The Bond Buyer, “I believe that the court has no jurisdiction to review the fiscal plan and budget as per 106(e) and hence both [the governor’s and the legislative leaders’] complaints should be dismissed.”

Feliciano said Puerto Rico’s business community believed the board would prevail in the legal struggle.

“PROMESA gives the board broad legal powers to negotiate binding debt settlements and to oversee all government spending,” said Gill Hall, who is writing a book about Puerto Rico’s debt crisis.

“What this week’s case is really about in my opinion is clarifying the line between overseeing via an approval process (macro) and ‘meddling’ in legislative choices (micro). And, more specifically: can the board’s negotiations target something that is not an intrinsic part of the task at hand" such as Law 80, which provides worker protections in Puerto Rico and isn't part of the budget?

“Even if the board loses the decision, however, it would probably be on narrow grounds,” Hall said. “The board will be left with vast powers even if they lose this particular math.”

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