Puerto Rico’s bankruptcy judge seemed sympathetic to the Oversight Board in its suit against the local government at a hearing Thursday afternoon.
The board had filed the suit or “adversary proceeding” in early July over unauthorized spending and a recently adopted law, Act 29, allowing the municipalities to not make retiree health care and pension contributions. When he signed Act 29, Gov. Ricardo Rosselló said the central government would make these payments for the municipalities. He said the law was a way to relieve financial pressure on the municipal governments.
Through his legal representative, Rosselló filed a motion on July 15 to dismiss the board’s case.
Since then there has been turbulence in Puerto Rico government. “It’s been a crazy two weeks,” said Peter Friedman, the lawyer representing the side of the governor and the other defendant, the Puerto Rico Fiscal Agency and Financial Advisory Authority.
Under pressure from members of his party and from demonstrators, in the last few weeks Rosselló resigned and had Pedro Pierluisi sworn in as his replacement. A few days later the Puerto Rico Supreme Court declared Pierluisi’s rise to governorship to be invalid. Since then the woman who had been Rosselló’s Secretary of Justice, Wanda Vázquez Garced, has become the governor.
In response to the unrest in Puerto Rico’s government, Judge Laura Taylor Swain agreed to postpone the motion-to-dismiss hearing twice but she rejected the local government’s motion to do so a third time.
Friedman wrote in filing with the court on Tuesday seeking a postponement of the hearing, “It is vital that Governor Vázquez be permitted to provide her guidance on Act 29 and the other aspects of the litigation regarding alleged patterns and practices of the office of the governor of Puerto Rico.”
“Defendants have serious concerns that proceeding with the hearing on August 15 does not provide them with an appropriate amount of time to fully discuss and evaluate the significant legal and public policy issues at stake here, formulate their positions of them, and engage with the Oversight Board if they believe it is appropriate to do so,” Friedman wrote.
But on Wednesday Swain issued a ruling that said despite the need for Vázquez Garced to review the case, it was best to avoid further delays in the case. Swain said Thursday’s hearing would go ahead as scheduled.
Board Chairman José Carríon and Executive Director Natalie Jaresko met with the new governor on Thursday. The board had troubled relations with Gov. Rosselló and after the meeting a reporter asked Carríon if he hoped to have better relations with Vázquez Garced. He said he did.
In Thursday’s arguments Friedman and the Oversight Board’s attorney, Martin Bienenstock, argued over whether sections of the Puerto Rico Oversight, Management, and Economic Stability Act authorized the local government’s actions and the board’s attempt to overturn them.
Friedman said the board was trying to use an overly broad interpretation of section 204, which bars the local government from issuing or otherwise modifying debt without the board’s authorization, to nullify Act 29.
He also said that the board’s use of section 204 was inappropriate because it allows local budgetary officials to “certify” laws as long as they aren’t “significantly” inconsistent with the fiscal plan.
Friedman said the board didn’t have the statutory right to challenge Act 29.
In response, Swain pointed to a PROMESA section that she said prohibited the local government from doing anything inconsistent with a fiscal plan.
Swain rhetorically asked Friedman if the governor “could blow an enormous hole” in the budget as long as he or she certified it to be consistent with the fiscal plan?
Bienenstock said Law 106 from 2017 had, among other things, directed the municipal governments to send pension and retiree health contributions to the central government so the central government would use them for those purposes. Rosselló signed Act 29 this summer, amending Law 29 on the issue of the municipal transfers.
Effectively, in Act 29 the central government had altered a debt the local governments had owed to it, Bienenstock said. PROMESA section 2017 bars the local government from altering debt, he said.
The board has challenged two dozen resolutions appropriating funds for expenditures not in the board-approved budget.
Bienenstock said that PROMESA section 204(c)(2) was aimed at preventing the local government from “reprogramming” money without first getting board approval.
He said that the local government’s estimate of the financial impact of Act 29 didn’t go beyond three or four year and so the estimate couldn’t possibly assure consistency with the board’s fiscal plan.
Bienenstock said through PROMESA section 205(a) the board had authority to address aspects of government policy beyond the issue of their consistency with the fiscal plan.
Swain said she’d take the lawyers’ arguments under advisement and would later release her decision.
