AAFAF: Oversight board’s plan to force gov’t to legislate debt restructuring is illegal

By The Star Staff

The Financial Oversight and Management Board will use its preemptive powers to move forward the commonwealth’s debt adjustment plan forward by seeking a court order to compel the governor and the Legislature, both of whom oppose pension cuts as part of the debt deal, to pass needed measures to enable the restructuring.

The Fiscal Agency and Financial Advisory Authority (AAFAF by its Spanish initials) accused the oversight board on Thursday of threatening the balance of power and called the proposed move illegal.

“It appears that the Oversight Board intends to rely on an unprecedented theory of preemption whereby PROMESA [the Puerto Rico Oversight, Management and Economic Stability Act] not only preempts and overrides Puerto Rico law, but can be used to compel the Government to legislate against its will,” the AAFAF said.

The debt adjustment plan that would restructure $35 billion in central government debt calls for the issuance of new general obligation (GO) bonds and other measures to enable it, all of which require legislative approval. But lawmakers and Gov. Pedro Pierluisi Urrutia have said they oppose the debt adjustment plan because it proposes a cut to pensions as part of the restructuring. The government recently enacted the Dignified Retirement Act, which establishes a policy against cutting pensions.

The oversight board said it will go to court to authorize the transactions needed to enable the debt adjustment plan.

“The Plan contemplates that legislation will be enacted by the Government on or prior to the Effective Date authorizing the transactions contemplated in the Plan, including the issuance of the New GO Bonds,” the debt adjustment plan states. “There is no certainty such legislation will be enacted, and if it is not, the Oversight Board will seek judicial relief in lieu thereof pursuant to PROMESA Section 305, allowing the Title III Court to interfere with governmental and political powers in a plan of adjustment or with the consent of the Oversight Board and to cause the issuance of the new GO Bonds.”

“There is no certainty the Title III court will grant the foregoing judicial relief, or that it would be upheld on appeal. In addition, issuing municipal securities without legislative support could negatively impact the market value of such securities,” a revised debt disclosure statement submitted to court this week said. “If the legislation authorizing the transactions contemplated in the Plan is enacted, future action by the Legislature could change the pertinent legislation in ways that affect the new GO Bonds.”

The AAFAF said the proposed action of the oversight board clearly aims to upend the careful balance of powers Congress sought to achieve in enacting PROMESA.

“The Board’s position that it can compel the elected-Governor and elected-Legislature, by federal court order, to legislate and take all actions necessary to implement the Plan undermines the structure of PROMESA and ignores the rights expressly reserved to the Government,” the AAFAF said.

By providing that Title III of PROMESA “does not limit or impair” Puerto Rico’s “political or governmental powers” to “control, by legislation or otherwise, the territory or any territorial instrumentality thereof,” Congress recognized that provisions of the Bankruptcy Code incorporated into PROMESA cannot be invoked to impair governmental powers without government consent, the AAFAF said.

The AAFAF said it is not aware of any case where a federal court, sitting in bankruptcy or territorial power jurisdiction, has successfully compelled a state or local legislature to legislate.

“Moreover, by depriving elected officials from exercising the political power vested in them by 2.4 million Americans, the Board’s proposed course of action would disenfranchise Puerto Rico of the most basic of democratic principles; something only seen in more authoritarian countries,” the commonwealth entity said.

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