San Juan suit tests reach of Puerto Rico fiscal board’s authority
Argues fiscal panel has yet to justify municipal effect on commonwealth’s finances
SAN JUAN — For the third time since its creation, the scope of the powers of Puerto Rico’s Financial Oversight and Management Board are being challenged in court. This time by the municipality of San Juan.
On May 9, the fiscal oversight board broadened its powers by designating all 78 of Puerto Rico’s municipalities as covered entities under the Puerto Rico Oversight, Management and Economic Stability Act (Promesa). Since September 2016, the panel had only designated nine agencies and public corporations as covered entities, including those under the federal law’s bankruptcy-like Title III.
In its U.S. District Court filing, the municipality of San Juan said the decision goes beyond the powers that Congress conferred on the board to provide a method for the commonwealth to achieve fiscal responsibility and access to capital markets.
“There are two paths: Consent or Confront,” San Juan Mayor Carmen Yulín Cruz recently said. “In San Juan, the decision is clear; there is no space to collaborate with the enemies of San Juan and the enemies of the people of Puerto Rico.”
The board already exerts control over the commonwealth’s budgetary and fiscal policies, San Juan’s lawsuit says. The fiscal panel has not fully explained why it deemed the designation of the 78 cities necessary more than two and a half years after classifying the commonwealth as a covered entity.
“There is no apparent reason why the Oversight Board also would need to exercise control over all municipal finances to achieve fiscal responsibility for the Commonwealth’s finances. Significantly, the Oversight Board has offered no rational explanation why designating all of Puerto Rico’s municipalities as covered entities would further its statutory purpose of achieving fiscal responsibility for the Commonwealth,” reads the suit brought by the law offices of Charlie Hernández; Mariani Franco Law and Winston & Strawn LLP.
The case is slated to become yet another test of the board’s powers. A U.S. judge ruled in August that the board had the power to enforce fiscal discipline on the island through the budgetary process but not to demand changes to the island’s laws.
The court ruled against the federally established entity when it attempted to appoint a chief transformation officer for the Puerto Rico Electric Power Authority, contending that Congress did not grant the fiscal panel “the power to supplant, bypass, or replace the Commonwealth’s elected leaders and their appointees.”
The board’s decision to place municipalities under its control raises legal questions because, under local law, municipalities are separate legal entities from the government. The suit further states that the decision undermines the self-governing structure of cities under the Autonomous Municipalities Act.
The suit uses several arguments to establish that the board’s designation of municipalities as covered entities is unrelated to its mandate to stabilize the commonwealth’s finances. First, the document alleges the board does not need to control municipal budgets to ensure they do not adversely affect the commonwealth’s fiscal status.
“This can be seen most clearly in the Commonwealth fiscal plans certified by the Oversight Board, which reduce allocations to municipalities by 80% over four years,” the suit reads.
Secondly, even if the board could explain why any particular municipality could potentially affect the commonwealth’s finances, “that would not justify treating all 78 of Puerto Rico’s municipalities as a monolith, regardless of their financial status or their effect on the overall Puerto Rican economy.”
Thirdly, the suit adds, the board’s plan for the vast majority of the municipalities it has designated “belies any implication” that their designation is necessary to achieve the commonwealth’s fiscal responsibility.
“In its press conference announcing the designation, the Oversight Board revealed that it had no plans for 68 of the 78 municipalities designated. Rather, the Oversight Board has singled out a group of 10 municipalities for a ‘pilot’ program. For each of these 10 municipalities, the Governor of Puerto Rico, in conjunction with the municipalities, is required to provide the Oversight Board with a ‘Municipal Fiscal Plan’ and a ‘Municipal Budget,’” the suit says.
“The selection of these 10 municipalities for special attention highlights the unreasoned approach and lack of urgency in designating the remaining 68 municipalities. Instead of conducting an individualized assessment of each of the remaining municipalities and their links to Puerto Rico’s overall fiscal health, the Oversight Board simply lumped them together in one broad and unreasoned designation,” the suit states.
Board Chairman José Carrión, and the Executive Director, Natalie Jaresko explained that there was no specific plan for the municipalities that are not part of the pilot program.
“Notwithstanding the lack of a ‘plan,’ the mere designation of San Juan has injured San Juan because the Oversight Board may now, at a whim, elect to impose onerous budgetary and fiscal approval processes. With the threat of the Oversight Board’s intervention in any aspect of San Juan’s budget or revenue hanging over them, the Mayor and the municipal legislature are forced to take time to consider how the Oversight Board may react to their decisions or seek to impose their policy preferences, thereby depriving the people of San Juan of their right to have their elected Mayor and legislature devote their full attention to administering the City in the manner they consider best,” the suit argues.
Mayor Cruz said the board designated San Juan despite the city having taken steps to balance its budget and even selling property to increase its revenue. Although the board has recognized cities as the primary service providers of the people, she added, the board “now wants to impose on cities the same austerity measures that have caused so much pain to the people.”