Despite the civility and cordiality that has characterized the Puerto Rico Oversight Board meetings, within that framework the battlelines were drawn for a colossal legal and political battle between the board and Governor Ricardo Rosselló’s administration.

Government Development Bank President Christian Sobrino, the newly-appointed Governor’s representative on the board, proving that he could fill his predecessor Elías Sánchez’ big shoes, came out swinging at his first board meeting, firmly stating that the Governor is not bound by the board’s “conditions” attached to the recently approved fiscal plan and further explained that the elected government of Puerto Rico will not comply nor implement the furlough that the unelected government wishes to impose.

Sobrino also announced that the public policy of the Rosselló Administration is to honor all pension commitments, which the board considers unfeasible.  Board members, especially Ana Matosantos, explained that retirees (which I fully disclose includes me) cannot be paid 100% of their pensions while bondholders would suffer huge “haircuts”.

Governor Rosselló points to the consistent record for the past 7 months of revenues actually overperforming forecasts and the hard fact that Sobrino forced Oversight Board Executive Director Natalie Jaresko to admit that the Board forecast of under $300 million (based on the information at hand last February)  in liquid resources by June 30 fell way short to the $1.8 billion total of cash-on-hand by that date (obviously by withholding debt service payments but also the result of cost-cutting measures).  Reality overshot forecasts to the tune of 6-to1. 

That difference of 600% between the board’s revenue forecast and reality triggers major distrust by creditors who are being asked to accept an 80% haircut based on a ten-year revenue forecast when the Board’s five-month forecast was off by 600%.

The Governor is seriously concerned about the effect that a temporary furlough and a permanent pension cut would have on shooting down any possibility of returning to positive economic growth. The harshness of those measures is heightened by the fact that Puerto Rico has historically had a negative savings rate and the Puerto Rican family doesn’t have significant savings to cushion even a 10% loss of recurring income, be it a public salary or a pension check.

Without an opportunity for any real public discussion before their decision to impose a furlough was made, the Board made it official days after it was leaked to the press.  Sobrino reiterated at the meeting Gov. Rosselló’s previously-announced decision that he will not execute the steps necessary for the furlough to become a reality and also briefed the Board and the public of the legal underpinnings for the government’s non-compliance.  The legal posture can most simply be summarized by then-Rep. Pedro Pierluisi’s analogy that the Board dictates the size of the room but the territorial government chooses the furniture.

We are now at the juncture where, absent an unlikely eleventh-hour negotiation between the Board and the territorial government, anywhere between mid-August and mid-September their differences will be laid out before the federal court to determine who is right.  When that determination is made, were it unfavorable to the territorial government, it would remain to be seen how it would be enforced if Gov. Rosselló were to refuse to do so, at least until it were finally be decided by the Court of Appeals or, ultimately, the Supreme Court.

In the meantime, revenues keep rolling in, and if the administration keeps on identifying spending cuts, and I believe that the Governor must be much more aggressive in doing so, at the end of the day not only will the government be able to afford avoiding a furlough and full payment of pensions, but have more revenues for debt service than originally contemplated.