On Tuesday August 7, 2018, Judge Laura Taylor Swain decided the motions to dismiss filed by the Board against the Government and Legislature’s complaints due to the fiscal plan and budgets. Judge Swain surprised us all with a constrained interpretation on jurisdiction. She stated at pages 14-15 of her decision:
Although PROMESA grants the Oversight Board exclusive authority to certify fiscal plans and “also insulates the Oversight Board’s certification determinations . . . from challenge by denying all federal district courts jurisdiction to review such challenges,” Section 106(e) does not deprive the district court of jurisdiction to entertain all conceivable litigation touching on certified documents. See Ambac, 297 F. Supp. 3d at 283-84 (holding that PROMESA Section 106(e) did not preclude consideration of federal constitutional challenges to fiscal plan). Here, Plaintiffs seek determinations as to whether PROMESA grants the Oversight Board authority to promulgate certain provisions of the certified Fiscal Plan and Budget, and as to whether such challenged provisions of those documents are merely, as a matter of law, recommendations that the Governor and Legislature are free to ignore. There is a material difference between an action seeking review of the Oversight Board’s determination that a plan or budget meets the requirements for certification or is compliant with particular aspects of PROMESA Section 201(b) (specifying required features of a fiscal plan), and litigation seeking clarification as to the effect of particular provisions of a certified fiscal plan or budget on preexisting Puerto Rico law, or on the powers of the executive and legislative branches of the government of Puerto Rico. The questions before the Court implicate the impact, rather than the propriety, of the certification of the Fiscal Plan and Budget, and their determination is not precluded by Section 106(e).
As I said, a constrained interpretation indeed, which assures that the governor will go back every time he does not agree with some action by the Board.
Furthermore, Swain dismissed without prejudice claims as to agency consolidation, saying the Board argues the Fiscal Plan does not require it (page 16-17) and employee benefits reduction (pages 17-19) because the Fiscal Plan does not require hiring freeze or elimination of Christmas bonuses. This will come back if they are required but they may be specific recommendations by the Board, which will stick, as we will see later.
Judge Swain ruled that Board can impose rejected recommendations, and said at pages 25-26:
The power bestowed on the Oversight Board by Section 205(b)(1)(K) of PROMESA allows the Oversight Board to make binding policy choices for the Commonwealth, notwithstanding the Governor’s rejection of Section 205 recommendations. This power is consistent with PROMESA’s framework, particularly in light of (i) the mandate that the Oversight Board “provide a method for [Puerto Rico] to achieve fiscal responsibility and access to the capital markets” (48 U.S.C.A. §2121(a) (West 2017)), (ii) the Oversight Board’s “sole discretion” to certify fiscal plans and put budgets of its own devising into effect (id. §§ 2141, 2142), (iii) PROMESA’s preemption of laws inconsistent with its provisions (id. § 2103), and (iv) PROMESA’s prohibition of gubernatorial oversight and of implementation of any policy that would “impair or defeat the purposes of [PROMESA] as determined by the Oversight Board” (id. § 2128(a)(2)). “[A]ppropriate,” as used in Section 201(b)(1)(K), means appropriate in the judgment of the Oversight Board, which has sole discretion as to fiscal plan and budget certification and the determination of whether and to what extent policies would impair or defeat the purposes of PROMESA, as informed by the Governor’s articulated reasons for opposing the recommendation. Section 201(b)(1)(K) does not distinguish between recommendations that are ultimately approved by the Government and those that are rejected. Instead, Section 201(b)(1)(K) speaks only of recommendations that were “submitted” by the Oversight Board, regardless of whether or not they were rejected by the Government. Consistent with this structure, PROMESA also provides that a budget or fiscal plan that is certified by the Oversight Board is “deemed approved by” the Governor. Id. § 2141(e)(2). Something that is “deemed approved” by the Governor need not actually have been approved by the Governor.
That this powerful authority to make certain important policy determinations ultimately rests with the Oversight Board does not, however, render the elected Governor irrelevant or toothless. PROMESA requires the Oversight Board to look first to the elected government for fiscal plan and budgetary direction, and requires extensive and specific communications, with opportunities for revision of proposals, in the event the Oversight Board considers a proposed plan or budget violative of PROMESA or of the fiscal plan, as the case may be. The parties acknowledge that there were extensive discussions and negotiations prior to the Oversight Board’s certification of its Fiscal Plan and Budget, and it is a testament to their hard work and good faith that only five areas of disagreement are currently in contention. Indeed, as Plaintiffs’ counsel noted at the Hearing, the Fiscal Plan spans “113” pages, and a “tremendous amount of working together” and “of listening” has narrowed the current dispute to the five issues. (Tr. at 128:25-129:4.)
Any fiscal plan provision adopting a recommendation over the Governor’s objection can be certified only after the Governor has had a formal opportunity to make his objections public and, indeed, to communicate any such objections to Congress and to the President. Those bodies could take negative legislative action or exercise powers affecting the composition of the Oversight Board were they to believe that the Governor had the better of the argument. Furthermore, the Oversight Board, in adopting a policy over such objections, faces the challenge of managing implementation of the policy in a way that garners the genuine cooperation of Puerto Rico’s elected government and the citizens of the island who voted for them, as well as the confidence of stakeholders and potential new investors whose interest in doing business with the Commonwealth will be crucial to the Oversight Board’s ability to fulfill its charge of providing a method to achieve access to the capital markets.
This determination puts an end to the governor’s ridiculous proposition that the Board could not make “public policy” (we literally hear this from him every day…) and its recommendations were only that. End of the folly! Judge Swain, however, cautioned as to the imposition of recommendations and stated at page 27:
It is thus clear that the Oversight Board’s ability to impose a rejected policy is not one to be exercised lightly. Nor is it, as a practical matter, one that is unconstrained. Although a budget approved and adopted by the Oversight Board as compliant with a certified fiscal plan becomes law insofar as it is in full force and effect without further action on the part of the Governor or the Legislature, and inconsistent Commonwealth laws are preempted, the Oversight Board has not been given power to affirmatively legislate. Thus, with respect to policy measures that would require the adoption of new legislation or the repeal or modification of existing Commonwealth law, the Oversight Board has only budgetary tools and negotiations to use to elicit any necessary buy-in from the elected officials and legislators. Elected officials and legislators, on the other hand, have the ability to obstruct implementation altogether, or complicate it in such a way as to cripple Puerto Rico’s ability to use it to promote the needed return to fiscal responsibility and access to capital markets. PROMESA is an awkward power sharing arrangement and, as the Court noted in its decision rejecting the Oversight Board’s attempt to appoint a Chief Transformation Officer for PREPA, is “fraught with potential for mutual sabotage.” In re Fin. Oversight & Mgmt. Bd. for P.R., 583 B.R. 626, 637 (D.P.R. 2017). “These negative possibilities should,” as the Court stated in that opinion, “motivate the parties to work together, quickly, for positive change” within the statutory structure in which neither of them holds all of the cards. Id. (Emphasis supplied)
Key point: “statutory structure in which neither of them holds all of the cards.” I hope that now the two sides can grow up and start acting like adults. After all, this is what Chairman Bishop wants and has asked for.
As to reprogramming, which is if there is money left over in a budget, can the governor use it without seeking permission from the Board, importantly, the Judge at pages 31-32, stated that it could not.
The Judge did give the Government small, probably meaningless victory by not dismissing the claims that automatic budget reductions are not allowed by PROMESA but she did warn that sec. of PROMESA 203 provides for the appropriate process. For the discussion, see pages 32-34.
As to criminal liabilities, although the Board denied it had the power to accuse criminally anyone, at page 36, the Court said:
Sections 203 and 204 of PROMESA prescribe procedures and limited remedies in the event of noncompliance with certified budgets and fiscal plans. Neither authorizes the Oversight Board to write into the law of Puerto Rico a general declaration that violations of the provisions of the appropriations provisions of the budget are an independent violation of law and, while PROMESA specifies certain consequences upon the Commonwealth’s failure to correct a inconsistency of expenditures versus the budget, the statute itself does not impose affirmative obligations on the Commonwealth or any or its officers or agents to take corrective action. Nor does PROMESA, by virtue of its provision rendering an Oversight Board-certified budget effective, create new liability under Puerto Rico law for violations of the budget. Defendants disclaim any intent effectively to amend Act 230 (the criminal provision) or claim prosecutorial authority, asserting at oral argument that the resolutions merely state the Oversight Board’s position that a violation of the certified budget is a crime within the meaning of the statute. (See Reply § III.D; Tr. at 113:19-25.) Nonetheless, these provisions of the Resolutions, read in the light most favorable to Plaintiffs, appear to claim powers and impose consequences in excess of those authorized by PROMESA.
The Court did not dismiss paragraphs 89-90 of the Complaint so it is still alive, albeit for the automatic budget reductions and criminal liability. Small victory indeed.
As to the Legislature’s complaint, the Judge decided that the Board can reduce the budget of the Legislature and that the Board is who decides, which budget is in effect and not the Legislature. She then dismissed the complaint outright. In effect, without saying it, Judge Swain decided it is irrelevant within PROMESA.
Both the Government and the Legislature are hinting that they will appeal the decisions. While the Legislature can appeal, the Government’s complaint was not dismissed and hence will have to seek permission from Judge Swain to do so. In the meantime, as long as these issues are alive, there can be no plan of adjustment. Welcome to Puerto Rico, the intersection of Macondo with the Twilight Zone.