About a month before the debate on the central government’s Plan of Adjustment (POA) begins, U.S. District Judge Laura Taylor Swain yesterday reaffirmed the powers of the Fiscal Oversight Board over Puerto Rico’s elected officials and the supremacy of federal PROMESA law over the laws of the U.S. territory by striking down the statute that sought to prevent cuts to public pensions: the Dignified Retirement Act.

By declaring Act 7- 2021 nullified Act 7 “unenforceable, and of no effect”, the also federal judge for the United States Court for the Southern District of New York explained that Act 7- 2021 was inconsistent with the Fiscal Plan, something Governor Pedro Pierluisi admitted when he initially endorsed it and later, in his arguments in the litigation against the Board.

“When the Governor signed Act 7, he issued a signing statement acknowledging that the Act was “significantly inconsistent” with the 2021 Fiscal Plan,” stated Swain.

But above all, Swain ruled that Act 7 of 2021 has no place in the current legal framework because rather than a public policy as the Executive and Legislative branches argued, the statute also “attempts to limit the power of the Court to enforce PROMESA and aims to dismantle any plan of adjustment

put forth by the Oversight Board and confirmed by the Court”.

“The ultimate determination of whether Act 7 violates PROMESA, and whether nullification is the appropriate remedy, is one for the Court to make,” wrote Swain noting that despite the Board´s repeated requests the Legislature and the governor failed to amend the statute.

Swain issued this strong statement about the consequences of the now nullified Act 7 in a 30-page decision, in which the judge partly granted and partly denied the motion for summary judgment sought by the Board to terminate the Dignified Retirement Act.

Act 7 and debt renegotiation

In her ruling, Swain insisted that “PROMESA has created “an awkward power-sharing arrangement,” in which the Oversight Board has significant tools to shape Puerto Rico’s financial operations, but it has “not been given power to affirmatively legislate.”

In that arrangement, Swain said, the fiscal agency created by the U.S. Congress has no power to legislate, nor can it push through a POA without the Legislature passing the necessary legislation. But on the other hand, neither the Legislature nor the Executive branch can intervene in the powers of the Board as the “only” entity to file and certify a fiscal plan and to renegotiate the public debt on behalf of Puerto Rico through a POA.

“The provisions of Act 7 have an immediate impact on the Oversight Board and the process of negotiating and seeking to confirm a plan of adjustment,” reads Swain´s decision.

Moreover, according to Swain, the days of Act 7 were numbered because the statute “further threatens to upend the current financial operations of the Commonwealth by impeding the Oversight Board’s advancement of its plan of adjustment, which the Oversight Board has certified is consistent with the Fiscal Plan”.

Blow at a decisive moment

Swain’s decision is the first setback for Governor Pierluisi and the legislative leadership controlled by the Popular Democratic Party in their strategy to protect public pensions, one of the components of the POA and which, among other things, promises a reduction in the annual payment to bondholders and restoring retirement savings to certain public employees.

The ruling puts an end to the unions and civic organizations´ strategy seeking to stop pension cuts and the freezing of retirement benefits promoted by the Board and, at the same time, put obstacles to the public debt restructuring.

This decision comes barely a month before the confirmation process for the POA begins and while thousands of creditors, including public employees and retirees, are voting for or against the proposal. The deadline for eligible pensioners and public employees to vote on the POA is October 18.

The seventh version of the POA promoted by the Board would cut some $21 billion in General Obligations (GOs), bonds of the Public Buildings Authority, the Employee Retirement System (ERS), as well as the debt of the Convention District Authority. The POA also proposes to restructure another $12 billion in other debt such as tax debts, litigation debts, debts with contractors, as well as claims against the central government but related to the Highways and Transportation Authority (HTA).

The plan would reduce the central government bond debt by approximately 15 percent, but the annual bond payment would be cut by almost two-thirds since the POA contemplates paying bondholders about $7 billion in cash.

Bill 1003

Swain issued her ruling after the Board warned that Pierluisi and the Legislature continue to “undermine” the entity´s efforts to get out of bankruptcy. This, not only by approving Act 7 but other laws such as one that would not allow the Financial Advisory Authority and Fiscal Agency (FAFAA) to implement a POA with pension cuts.

With her ruling, Swain places the island’s elected officials at a crossroads, as both the Puerto Rico House and the Senate must reach an agreement on House Bill 1003, which would be key to implementing the POA and which is an explicit condition requested by bondholders. The leadership of both bodies and Board members must meet on October 16 with the expectation of reaching an understanding.

Among other things, Bill 1003 would allow the issuance of new bonds to exchange existing debt and would create the Contingent Value Instrument (CVI), a mechanism that would allow bondholders to recover the cut on their claims if the economy and excise tax collections exceed projections.

But the bill conditions debt issuance on not including pension cuts in the POA.

The Board has also drawn the line.

“HB 1003 the Senate passed to approve bonds part of the #PlanOfAdjustment puts confirmation in jeopardy and gambles with PR’s future. Senate introduced provisions that cost $$ tens of billions, repeats spending practices that drove PR into bankruptcy,” said the Board and added that

The “PlanOfAdjustment would cut the Commonwealth’s outstanding debt by 80%. Before PROMESA, 25 cents of every dollar the govt. collected in taxes and fees from the people of PR went to creditors; #PlanOfAdjustment would reduce that to just over 7 cents”.

The Governor reacts

Yesterday, Pierluisi reiterated that he is inclined to sign Bill 1003.

“I am going to review it. Based on the information I have, I am inclined, I think, that I could sign it. But I must review it with my work team,” said the governor as he left the Convention Center, where he was participating in an event yesterday.

For Pierluisi, the Senate amendments do not change their purpose.

“What it (Bill 1003) expresses is the Legislative Assembly’s desire for the Board to make some changes to the POA,” Pierluisi said.

“I am going to make the arrangements before the (Board) because although I do not have all the details of what was included in the memorandum, I am sure that I will agree with most of its contents. These are steps that I will be taking before the Board,” the governor said.

“Again, we must remember that it is useless for the (Board) to come and object to this bill because if the (Board) does that, we have to start all over again and there is no time to lose here. This restructuring is positive for Puerto Rico,” Pierluisi said, recalling that the measure provides additional funds for the University of Puerto Rico.

“I am focused on the goal. As far as I see it, the bill (1003) is going to achieve the goal: that we have the restructuring mechanism. Of course, if it is binding for the Board that there cannot be pension cuts. It clearly states that if there are pension cuts, the law cannot be used to make cuts on restructured bonds. It doesn’t get any clearer than that,” Pierluisi said, adding that the fiscal plan, which lays the groundwork for the POA, will have to be revised.

The Board did not issue a statement following Swain’s ruling.

Reporter Gloria Ruiz Kuilan contributed to this report.