Puerto Rico Title III bankruptcy Judge Laura Taylor Swain sided mainly with the Puerto Rico Oversight Board in a legal struggle with Gov. Ricardo Rosselló concerning the extent of the board’s powers over the island’s elected government.

After the court released its decision Tuesday, the governor released a statement vowing to disobey Swain’s order. “The federal court ruling states that our public employees won’t receive their deserved Christmas bonus unless the government takes unjustified, draconian measures against our very own employees, which include massive layoffs. We are adamantly opposed and will not comply with the decision.”

Puerto Rico Gov. Ricardo Rosselló
Puerto Rico Gov. Ricardo Rosselló said he would not comply with the judge's decision in his suit against the Oversight Board.

On July 5 the governor had filed an adversary complaint in the Title III case against the board asking the court to make clear that the board was overstepping the powers granted to it in the Puerto Rico Oversight, Management, and Economic Stability Act. On July 12 the board filed a response asking for the court to dismiss the governor’s claims.

On Tuesday afternoon Swain sided with the board on several key issues, with the governor on some less important claims, ruled the governor didn’t have a “ripe case or controversy” on certain claims, and left several claims unresolved.

“PROMESA is an awkward power-sharing arrangement,” Swain said. However, “The power bestowed on the Oversight Board by section 205(b)(1)(K) of PROMESA allows the Oversight Board to make binding policy choices for the Commonwealth.”

However, this does not “render the elected governor irrelevant or toothless.” She noted that the governor is required to start the process of budget creation, that he has the right to publicly object to fiscal plan provisions, and that the local government can in practice obstruct the implementation of board-ordered policy.

Swain ruled that the board had power over the “reprogramming” or control of Puerto Rico departmental unspent money.

She said that the board could include binding “policy” statutes in its fiscal plans even if the governor rejected them.

She said she would not rule against the board’s efforts to consolidate government agencies, eliminate the Christmas bonus, impose a hiring freeze, standardize healthcare provided to government employees, and prohibit future liquidation of sick and vacation days. She said this was because the board stated it isn’t compelling the governor to do these things but rather is cutting the budget with the assumption that these things will be done. She said the board has the right to impose a budget on the local government.

Swain sided with Rosselló on his claim that the board was using planks of its approved budget to write Puerto Rico law concerning budgetary matters. She said that these planks appeared to overstep the powers that PROMESA gave the board.

The current board-approved fiscal plan states, “If, after the third fiscal quarter of any fiscal year there remains unrealized agency efficiency savings for any grouping relative to the projected agency efficiency savings in the new fiscal plan for the applicable fiscal year, the Oversight Board will automatically reduce the budget for the corresponding grouping for the following fiscal year in the amount equal to the unrealized agency efficiency savings.”

Swain ruled this was contrary to the pattern of interactive solicitation and revision of the budget that PROMESA requires between the local government and the board. However, since Swain said that the board was ultimately in charge of the budget, this victory for Rosselló may largely be empty.

Swain left unexplained her ruling on five of the 19 requests for remedy found in the governor’s July 5 filing against the board. She indicated that she wasn’t dismissing them as the board had requested. In her second to last sentence she wrote, “This adversary proceeding remains referred to Magistrate Judge Dein for general pretrial management.”

It remains to be seen what will happen with these five requests or the adversary complaint in general.

Concerning the ruling, the governor said, “This ruling is further proof of Puerto Rico’s colonial status and our lack of self-government. We must put an end to this undignified relationship that allows Congress to discriminate against us and take actions – without our consent – that are detrimental to our island.”

“While we analyze the possibility of appealing the court’s decision, we will keep looking for ways to work with the Oversight Board so that we avoid harsh, draconian measures that would be detrimental to our people,” Rosselló said.

The board released a statement saying it welcomed the court decision to “uphold its authority to approve and certify fiscal plans and budgets for the commonwealth and its instrumentalities.”

“In the coming days and weeks, the board expects the government to deliver material progress on reforms to increase public sector efficiency and transparency, and make Puerto Rico’s economy more competitive and attractive for businesses and investors,” said board Chairman José Carríon. “At the same time, we will continue to pursue plans of adjustment with creditors to achieve debt restructurings and a return to the capital markets.”

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