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Boston Court: Puerto Rico May Not Spend Beyond Board-Certified budgets

By on December 19, 2019

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SAN JUAN – Dealing another blow to Puerto Rico’s fiscal autonomy, the U.S. First Circuit Court of Appeals in Boston has upheld a ruling by U.S. District Judge Laura Taylor Swain that the Financial Oversight & Management Board (FOMB) has the authority to leave out spending items from both the commonwealth’s fiscal plan and budget that have not been certified by the board.

In the ruling issued Wednesday by Appeals Court Circuit Judge William J. Kayatta Jr., the court agreed with Judge Swain’s ruling against former Gov. Ricardo Rosselló and the Puerto Rico Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym) that the federal Puerto Rico Oversight, Management and Economic Stability Act (Promesa) prohibits the governor from spending any funds that have not been programmed in the FOMB-certified budget for a given fiscal year.

The ruling also names Gov. Wanda Vázquez Garced as a plaintiff and appellant, while the FOMB is named as defendant and appellee, and the Official Committee of Unsecured Creditors is named as intervenor and appellee. Besides Judge Kayatta, the case was heard by Appeals Court Chief Judge Jeffrey R. Howard and Circuit Judge Juan R. Torruella.

The Rosselló administration had sued the FOMB in U.S. District Court for banning the practice of “reprogramming,” or reassigning funding that had been authorized but not actually spent in the previous fiscal year, 2019, so that it could be used during the current fiscal year 2020, which began July 1. The administration argued that because the board had unsuccessfully recommended that the governor agree to such a ban, it could not thereafter adopt the ban as binding over the governor’s objection, citing Section 205 of Promesa.

In her ruling on the FOMB’s motion to dismiss the complaint for failure to state a claim, Judge Swain sustained the ban on reprogramming, deciding as a matter of law that the board did not surrender its powers to act unilaterally regarding a policy proposal by first seeking agreement from the governor. In any event, the board’s “certification of a budget under Promesa precludes reprogramming of previously authorized expenditures from prior years,” according to Judge Swain, who is overseeing the commonwealth’s debt restructuring process under Promesa.

In their ruling favoring Judge Swain’s position, the Appeals Court judges said that while Promesa favors collaboration with the governor “when possible” in developing a fiscal plan and budget, the board reserves the “ultimate power” to develop and submit them with the implicit approval by the governor. The ruling notes that the governor had not disclosed what funds would be reprogrammed and where they would be reassigned.

The commonwealth argued in its appeal that Promesa Section 204 (c) allows the territory’s government to seek reprogramming at any time, albeit subject to the board’s approval. It also argues that the reprogramming suspension provisions are contrary to existing Puerto Rico statues and Article II, Section 18 of the Puerto Rico Constitution.

“These arguments all miss the mark,” the Appeals Court judges said in their ruling. “As the district court explained, Promesa prohibits the Governor from spending any funds that are not budgeted regardless of whether the recommendation had been adopted.”

The judges ruled that Promesa Subsection 202 (e) (4) (C) “precludes” the commonwealth government from reprogramming funds from prior fiscal years, “except to the extent such reprogrammed expenditures are authorized in a subsequent budget approved by the board.” They noted that any Puerto Rico law to the contrary is “preempted by virtue” of Promesa Section 4.

“Simply put, if a certified budget is to have ‘full force and effect’ [according to Promesa], there can be no spending from sources not listed in that budget, regardless of what any territorial laws say,” the ruling states, noting that it does not address the possibility that the board may amend the budget to make provide for use of unspent funds that it identifies.

“Here, it is undisputed that the budget adopted by the Board does not authorize whatever unknown expenditures that the Governor has in mind,” the ruling reads.

The board recently sent a letter to Gov. Vázquez, legislative leaders and several agency heads indicating that a number of bills passed are inconsistent with the fiscal plan it certified, including measures proposing unbudgeted salary increases to certain groups of public employees, and joint resolutions that propose to allocate funds from prior years, which it says is reprogramming.

In a more recent letter to Aafaf Executive Director Omar Marrero, FOMB Executive Director Natalie Jaresko questioned La Fortaleza Executive Order 2019-61, which restores vacation- and sick-leave days for public employees. Absent a source of funding for the period of the fiscal plan, she said, this measure is inconsistent with the fiscal plancand certified budget.

In fact, the Appeals Court judges acknowledged that this ruling could be a template for how they will evaluate similar cases that are sent to them in the future.

“The potential use by the Government of so-called reprogrammed funds is apparently a subject of continuing dispute, and its resolution now will likely assist the district court in assessing other existing and future disputes regarding the relationship between the Board and the Governor,” the judges ruled.

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