Puerto Rico’s bankruptcy judge rejected a motion by the island governor, indicating her sympathy for the Oversight Board’s arguments that it has the authority to overrule local authorities on financial matters.
Judge Laura Taylor Swain released her opinion and order Thursday afternoon in the adversary proceeding in Puerto Rico’s Title III bankruptcy. The board filed the proceeding in early July in the U.S. District Court for Puerto Rico against Gov. Ricardo Rosselló. He he has since been replaced by Wanda Vázquez Garced who became the new defendant. The board’s suit is also against Puerto Rico’s Fiscal Agency and Financial Advisory Authority.
In its suit, the board focused on what it sees as three illegal practices or laws of the Rosselló administration. First, it objected to Law 29, “Law to Reduce the Administrative Burden of Municipalities,” which ends the municipalities’ responsibility to reimburse the central Puerto Rico government for the pension and health care costs of their retirees.
Rosselló signed the measure into law on May 17 and Vázquez has been implementing it.
Second, the board challenged two dozen resolutions appropriating funds for expenditures that weren't in the board-approved budget.
Third, the board called for the judge to declare the governor’s practice of failing to provide laws for board financial review, complete with cost estimates, within seven days to the board, to be illegal.
In her opinion, Swain indicated her inclination to support the board on all eight counts cited by the board.
For example, in the motion to dismiss the suit, the defendant had said it had fulfilled the requirements of the Puerto Rico Oversight, Management, and Economic Stability Act to have an expert government body provide a certification of Law 29’s compliance with the fiscal plan.
Swain wrote, “Defendants explicitly argue that delivery of any sort of estimate on official agency letterhead, no matter how conclusory or incomplete, with any documents labeled a certification and delivered by the governor attesting that a piece of legislation has no significant impact on a fiscal plan, is effective to insulate the legislation from any challenge by the Oversight Board, whether or not the content of the documents is complete or plausible.
“Defendants’ position elevates form over substance and is unavailing under the circumstances pleaded in the complaint,” Swain continued. “It is not consistent with the letter, spirit, or legislative context of the statutory provisions upon which defendants rely.”
Swain said the board has pleaded facts that there is a financial discrepancy between Law 29 and the most recently approved fiscal plan from hundreds of millions of dollars to over $2 billion.
The board said that Law 29 and dozens of legislative joint resolutions allocating money from earlier years’ budgets that hadn’t been spent were contrary to PROMESA Section 204(c)(2) that bars the legislature from “reprogramming” funds without prior board approval.
The defendants had argued that the PROMESA section didn’t give the board the right to nullify already enacted legislation and that Law 29 didn’t “reprogram” funds but just excuse local governments from contributing to pensions and health systems.
Swain rejected the defendants’ claim that the board’s control on reprogramming was only prospective, saying PROMESA allowed it to look backwards as well. She rejected that Law 29 couldn’t be called a reprogramming, saying that the lack of funds to the central government would have a major financial impact on the central government.
As a practical matter, Swain in her opinion and order merely allowed the board’s cases to continue. However, the sweep of her rejection of the defendants’ arguments suggests she will side widely or completely with the board’s requests when she ultimately releases her case decision.
