The U.S. Court of Appeals for the First Circuit struck down a challenge to the Puerto Rico Plan of Adjustment Tuesday in a win for the Oversight Board and various other stakeholders, though the court is still considering another challenge to the plan.
Judge William Kayatta wrote the decision in the case brought by Puerto Rico teachers’ associations seeking to overturn the plan’s treatment of their pensions. The two other judges on the panel agreed with Kayatta.
The plan freezes future accruals under the defined benefit plan held by those teachers hired prior to August 2014 and eliminates certain cost-of-living adjustments going forward. Kayatta, for the First Circuit panel of judges, rejected three arguments made by the teachers.
First, the
The teachers did not explain why the plan’s rejection of Puerto Rico’s forward obligations to provide pensions “does not render unenforceable the statutes that give rise to that obligation,” Kayatta said. Additionally, the board cannot only use “rejection” to justify its stance, it can also use doctrine of “preemption.” He said language in the bankruptcy laws incorporated by PROMESA allows this.
Second, the teachers said PROMESA requires the local legislature to pass laws to allow the changes to the contracts. But PROMESA only says the local legislature must provide certain approvals and the board does not need the legislature to make these changes, Kayatta said.
Third, the teachers pointed to language in the local law authorizing the Plan of Adjustment, Act 53-2021, that speaks of “zero cuts” to pensions as being a prerequisite for the authorization of the bonds. Kayatta said it is not clear that the freeze on further accruals or the elimination of cost-of-living increases should be considered “cuts.”
Additionally, Kayatta said, if the legislature wanted a definition of cuts to preempt the board’s planned changes to teachers’ benefits, it could have easily done so. But it did not, indicating that change was not part of the legislature’s intentions.
Kayatta also affirmed the U.S. District Court’s approval of the Plan of Adjustment.
“The decision is unfortunate for the teachers in Puerto Rico and the impact of this Plan of Adjustment in the education system of the island is detrimental,” said Attorney Jessica Méndez Colberg, one of the teachers’ two attorneys. “We respectfully disagree with the First Circuit's appreciation of the arguments set forth before the court. The court applied the doctrine of preemption as a means to an end, instead of engaging in the preemption analysis that was warranted in order to determine if in fact the retirement laws were preempted. The case raises issues far more complex than the mere treatment of claims as the decision portrays.”
Méndez Colberg said the teachers’ groups “are not done in their fight for a dignified retirement.” The groups could seek a review by the First Circuit Court or by the U.S. Supreme Court but Méndez Colberg did not elaborate on their plans.
The Puerto Rico Oversight Board said it welcomed the decision after arguing earlier this year that allowing the challenge to move ahead
The Plan of Adjustment “lifts an enormous weight off future generations by reducing the debt to affordable levels and protects pensions by ensuring the government sets aside sufficient funds to honor retiree commitments in the future,” the board said.
The teachers’ associations that filed the appeal were Federación de Puerto Rico; Grupo Magisterial Educadores(as) por la Democracia, Unidad, Cambio, Militancia y Organización Sindical; and Unión Nacional de Educadores y Trabajadores de la Educación.
Along with the teachers’ group challenges, there were separate challenges to the Plan of Adjustment filed by Puerto Rico credit unions, by an eminent domain/inverse condemnation claimant against Puerto Rico, by the Puerto Rico Oversight Board, and by a few other parties. All are seeking to undo certain aspects of the plan and not to completely reverse implementation of the plan.
These appeals have been consolidated into a single case in the First Circuit Appeals Court.
The board said covering the teachers claims would be the most expensive, estimating the costs at over $1 billion. It has said accommodating reversals on the credit unions or eminent domain/inverse condemnation treatment would be more affordable for Puerto Rico’s government.
The board appeal of the plan was because it believed it was too generous to eminent domain and inverse condemnation claims.
The credit unions appealing are Cooperativa de Ahorro y Crédito Abraham Rosa, Cooperativa de Ahorro y Crédito de Ciales, Cooperativa de Ahorro y Crédito de Juana Díaz, Cooperativa de Ahorro y Crédito de Rincón, Cooperativa de Ahorro y Crédito de Vega Alta, and Cooperativa de Ahorro y Crédito Dr. Manuel Zeno Gandía.
The credit unions have argued Puerto Rico’s central government engaged in fraud by pressuring it to buy nearly $1 billion of notes and bonds from various Puerto Rico government entities, many of which have been deeply cut in the current plan and in earlier Puerto Rico restructurings for the Government Development Bank and the Puerto Rico Sales Tax Finance Corp. (COFINA).
