Fiscal board: Stay on bankruptcy process would harm gov’t, public interest
By The Star Staff
The Financial Oversight and Management Board objected on Thursday to a request by teachers’ groups seeking to stay the bankruptcy process while their challenge to the confirmation of the debt adjustment plan is being reviewed by the U.S. First Circuit Court of Appeals, arguing that it would harm the government.
“Delaying the Plan’s effective date and implementation would also impose monetary harms on various parties: Creditors would lose interest on the approximately $10.8 billion in cash that will be distributed under the Plan, the Pension Reserve Trust established by the Plan would lose hundreds of millions of dollars in funding, and the Commonwealth would incur millions in new pension liabilities that would have been frozen under the Plan because pension benefits continue to accrue up to the Plan’s effective date,” the oversight board argued.
Meanwhile, the Judiciary Association on Thursday withdrew its challenge to the confirmation of the debt adjustment plan, which would restructure some $33 billion in debt. The association did not reveal the reasons for withdrawing the court challenge.
The oversight board noted in its request that the debt adjustment plan would reduce the commonwealth’s debt by 80%, save the commonwealth more than $50 billion in debt service payments, and address the commonwealth’s $55 billion in unfunded pension liabilities.
“The significance of Plan confirmation cannot be overstated,” the oversight board said, adding that the associations are among “a small minority of stakeholders that opposed the plan.”
Unlike the stakeholders incurring substantial losses who accepted the plan, the associations’ members are paid in full all the pension benefits they will have earned through the effective date of the Plan. They are appealing because the Plan discharges their statutory and contractual rights to earn incremental defined pension benefits for future services they render after the effective date. For those services, the Plan substitutes defined contribution plans and other pension benefits such as Social Security contributions because the defined benefit plans were the primary cause of the financial distress in the magnitude of $55 billion, the oversight board said.
The oversight board argued that a delay in the plan’s implementation would imperil Puerto Rico’s fiscal recovery.
“A stay pending appeal should be denied because the Associations have not established any of the four prerequisites for such extraordinary relief,” the board said. “First and foremost, the Associations have not shown that they are likely to succeed in their appeal. This Court previously considered and rejected each of the arguments that the Associations intend to press on appeal.”
The associations argue that the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) does not preempt certain Puerto Rico statutes imposing pension-related obligations on the commonwealth, but the oversight board said that does not matter.
“Regardless of whether the statutes are preempted, the obligations they create are dischargeable and are treated under the Plan,” the board said. “While preemption might affect whether the Associations’ members have allowable claims entitled to distributions under the Plan, the Plan gives them the benefit of those claims anyway. Moreover, the Associations are wrong about preemption. PROMESA expressly provides that all laws inconsistent with it are preempted.”
The associations also fail to show that they will be irreparably harmed absent a stay, the oversight board said. In their motion, the associations contend that, without a stay, they will suffer financial harm and their appeal may become moot before it is resolved.
“It is well established, however, that a potential for mootness and a loss of money alone do not constitute irreparable harm,” the oversight board argued.
The oversight board also contends that a stay would undermine the significant public interest in putting Puerto Rico on an immediate path to fiscal recovery and giving it the ability to balance budgets and honor pension payments.
The board’s stance was supported by the Unsecured Creditors Committee and other groups.