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House committee aide presses FOMB to push Promesa limits

By on April 19, 2018

Editor’s note: This story first appeared in the April 19-25, 2018, issue of Caribbean Business.

It may take more forceful action from the Financial Oversight & Management Board (FOMB), created by the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), to challenge the boundaries of the federal law to put an end to “bickering” between Gov. Ricardo Rosselló and the fiscal control board that is costing the island far too much in legal fees. So said a U.S. House Natural Resources Committee aide during an interview last week with Caribbean Business.

“Someone is going to have to push the law to its limits, and I think it is going to have to be the oversight board,” the House Committee aide told Caribbean Business. “So, what I would expect to play out is, and this is a hypothetical—the oversight board will have to approve their own fiscal plan, to impose new budgetary measures in accordance with that fiscal plan. For the governor to say “no, we are not going to enact that,” and for the oversight board to sue and really challenge to see how far they can push Promesa’s powers. At the end of the day, I think that is actually the only way we are going to have a resolution of what the oversight board is really capable of. Because there are so many unanswered questions, and this petty bickering really isn’t answering any of the questions.”

At this writing, the political gamesmanship underpinning the restructuring of Puerto Rico’s debt raises concern on Capitol Hill among many representatives who see challenges to Promesa driving legal costs into the stratosphere. The Commonwealth’s fiscal plan calculates legal and professional fees could reach $1.4 billion over the next five years alone.

Puerto Rico bankruptcy judge approves $4.4M in legal fees, $215,000 in expenses

The Rosselló administration launched its first challenge to Promesa in October 2017 when the governor’s legal team filed a lawsuit over the board’s naming of Revitalization Coordinator Noel Zamot as the Puerto Rico Electric Power Authority’s (Prepa) Chief Transformation Officer. Federal Judge Laura Taylor Swain, who is overseeing Title III bankruptcy proceedings in the Federal District Court for the District of Puerto Rico, sided with the Rosselló administration in deciding that the board did not have the authority to take over Puerto Rico’s government instrumentalities.

One GOP source on the Hill, who is well-acquainted with Promesa, shared the Natural Resources Committee perspective on Judge Swain’s decision with this comment: “So, short of taking over, you know, an instrumentality, I do think that they [the board] do have broad discretion to enforce budgetary cuts and to try to keep the fiscal plan moved through.”

In that sense, sources on the Hill with ties to the GOP believe Judge Swain’s decision and a tendency for the board to shy away from controversy have emboldened Gov. Rosselló to further test boundaries of the law.

“Well, you saw it during the controversy over the furlough where they [the board] withdrew their legal case, so you have an untested principle of Promesa—it’s pretty clear that the board has the ability to impose that but because they [the board] withdrew that, there is a lot more confusion and the government feels emboldened,” said the committee aide. “So, the oversight board is really going to have to stick to its guns if it wants to impose its will. They can’t just threaten something and then pull it back. They have to see it through. They can’t continue with this game where the governor disagrees with the board, the oversight board disagrees with him.”

In this latest round of the standoff between the governor and the board, Rosselló continues to challenge the entity’s authority to enforce policy measures in draft fiscal plans delivered to the FOMB on April 5.

As for accepting a different fiscal plan imposed by the board, Rosselló reiterated on April 4 that neither the executive branch nor the Legislature could be forced to implement it. “We do not have to go to court,” he said, “We are doing what’s in the law.”

Promesa, which also established the fiscal board, states that if the government does not agree with the panel’s recommendations, it must explain to the president of the United States and Congress the reasons for rejecting them. Rosselló said he sent a letter last year explaining his rejection of some of the measures of the previous fiscal plan and that nothing came of it.

Rosselló’s challenge of federal authority over the territory is not limited to the board’s purview under Promesa; the governor sent a scathing letter to congressional leadership denouncing U.S. Treasury’s failure to authorize unencumbered disbursement of Community Disaster Loan (CDL) funds of up to $2.03 billion.

The governor’s stance forced the U.S. Treasury to draft additional terms tied to the disbursement of the CDL funds. In a story first reported in Caribbean Business, a source with ties to the Trump administration explained that the CDL funds could not be delivered unencumbered because Puerto Rico is restructuring its debt through Title III of Promesa. “The other important thing to know is that this document is heavily predicated on the Promesa board’s approved budgets—the thing that baffles people is that the governor believes it is predicated on his budget, no matter what the board says,” the Trump administration source told Caribbean Business. “If that is true, he is never going to get that money.”

The committee aide confirmed the administration’s stance explaining: “The CDL is really in response to the hurricane. So, I would kind of seek out the whole fiscal consequences to Puerto Rico. Although Treasury is tying the CDL into [fiscal consequences] because as a Community Disaster Loan you have to demonstrate you are having liquidity issues and because Puerto Rico is not paying back any of its debt, there are no liquidity issues. And so, my conversations with the [Trump] administration have indicated they don’t believe Puerto Rico ever had a need for the CDL, to be honest.”

At press time, Judge Swain awarded the interim compensations requested by Andrew Wolfe; O’Neill & Borges; and Ankura Consulting Group.

–Senior reporter Eva Lloréns Vélez contributed to this report.

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