Monday, May 20, 2019

Swain’s World: A Repeal of Promesa Would Raise Concerns About Puerto Rico’s Fiscal Future

By on December 6, 2018

Editor’s note: The following originally appeared in the Dec. 6-12, 2018, issue of Caribbean Business.

The Puerto Rico bankruptcy case had significant developments this week.

A panel of the First Circuit Court of Appeals appeared reluctant early this week to declare the Financial Oversight & Management Board unconstitutional because its members were not appointed through the advice and consent of the U.S. Senate. The Boston court worried about repercussions of doing so would have over the restructuring of the island’s $72 billion debt.

These issues were brought up during an appeal before the middle court of a ruling in which bondholders challenged the legality of the Oversight Board. Aurelius Capital Management, a hedge fund that is one of Puerto Rico’s creditors, and Utier, the Irrigation & Electrical Workers Union of the Puerto Rico Electric Power Authority, had challenged the restructuring of Puerto Rico’s debt by contending that members of the Oversight Board should be appointed by the U.S. president and confirmed by the Senate as established by the Appointments Clause of the U.S. Constitution.

Judge Laura Taylor Swain, earlier this year, concluded that board members did not need to meet the requirements of the Appointments Clause because they are not federal officers, but territorial officers appointed by Congress by virtue of the Territorial Clause. The fiscal board is composed of seven voting members, with Puerto Rico’s governor or his designee serving ex officio as an additional nonvoting member. The Puerto Rico Oversight, Management & Economic Stability Act (Promesa) provides that the President of the United States “shall appoint” the seven voting members as follows: one “may be selected in the President’s sole discretion” and six “should be selected” from specific lists of candidates provided by congressional leaders.

Promesa does not require presidential nomination or Senate confirmation. However, in the event that the President appoints members who are not named on the congressional lists, Senate confirmation is required under Promesa.

The law, nonetheless, was created to bring financial stability to Puerto Rico, raising concerns about its repeal.

“What happens to the mandate of Promesa?” Justice Juan Torruella asked. The response by some lawyers was that the board could continue to function to help provide stability to the island, subject to the revisions of a new board.

However, Jeffrey Wall, a U.S. Justice Department assistant solicitor, said he could not stress the severe consequences with an overturning decision from Swain. He noted that it would entail a dismissal of all Title III proceedings and leave the government with little money to operate.

The debate in the case, however, centered on whether Congress had the authority to appoint board members the way it did. The Appointments Clause is enforceable over principal federal officers and not lower officers.

Theodore Olson, a former U.S. solicitor general and lawyer for Aurelius Capital Management and Assured Guaranty, said the constitutional principle of the separation of powers is “a guarantee of a just government and liberty for the people” and “the core of separation of powers is embedded in the Appointments Clause.”

Justice Torruella asked whether the Appointments Clause had an application in the District of Columbia, which is not a state. Olson said it does because of Supreme Court rulings from the 1800s in which the appointments of justices of the peace were overturned.

However, Olson acknowledged that over the past 10 years, officials appointed in the District of Columbia have been subject to the supervision of the U.S. Treasury Department.

He did, however, say board officials meet the definition of “principal officers” subject to the Appointments Clause because they exercise significant authority and are not there for a short period of time.

The Appointments Clause of the U.S. Constitution distinguishes between “principal officers,” who must be nominated by the U.S. President with advice and consent of the Senate, and “inferior officers,” who may be appointed by the “President alone, Courts of Law or department heads.”

“Article 4 [of the U.S. Constitution] makes no distinction about territorial or state officers…. The powers of Promesa come from a U.S. statute,” Olson said.

However, Don Verilli, a counsel for the board, provided several examples in which Congress has repeatedly made appointments in the territories without following the Appointments Clause. He gave historical examples of the President’s appointment of officers in the 19th century in D.C., Louisiana, Florida and the Philippines.

Torruella noted that under the 1900 Foraker Act, the U.S. President appointed officials for Puerto Rico with the consent of the U.S. Senate, but Verilli noted that under the Jones Act in 1917, the president appointed officials to the island without the consent of the Senate.

Rolando Emmanuelli, the lawyer who spoke on behalf of Utier, tried to speak about the Insular Cases, a series of cases about U.S. territories that have helped justify the territories’ unequal treatment.

However, Torruella reminded Emmanuelli that those cases have not been overturned and the Boston Court could not decide on them. “But this court should not allow the overextension of the Insular Cases,” Emmanuelli argued.

Cofina deal

The deal that will restructure bonds from the Puerto Rico Sales Tax Financing Corp. (known as Cofina) may have implications for the municipal market as a whole, according to stateside media.

Because of the Cofina deal, at least one credit rating agency, S&P Global Ratings, is using a different standard to determine ratings for priority lien debt, which like Cofina, has a top claim in state and local governments.

Stateside media has reported that the credit rating of more than $40 billion in New York bonds was lowered from its AAA status. Some $6 billion of Connecticut debt was reduced two notches, but $3.7 billion in Chicago Convention Center debt left its junk status, even though nothing about this debt has changed.

The S&P is saying it doubts priority liens in a U.S. mainland jurisdiction will survive a financial collapse similar to the one taking place in Puerto Rico.

Investors have been advised that ratings are slated to change. The company, which grades about 1,300 priority tax-lien obligations, has said 45 percent of the ratings are slated to change, according to stateside reports.

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