Puerto Rico bankruptcy judge upholds oversight board powers over government

By Luis Valentin Ortiz

SAN JUAN (Reuters) - A U.S. judge ruled on Tuesday that Puerto Rico's federal oversight board has the power to enforce fiscal discipline on the bankrupt island's government through the budgetary process, but lacks authority to demand changes in law.

Governor Ricardo Rossello and Puerto Rico's legislature filed lawsuits in July claiming the board, which was created by the U.S. Congress under the so-called PROMESA Act in 2016, overstepped its power by imposing a belt-tightening fiscal plan and budget on the government that require public policy actions.

The board, which sought to dismiss the litigation, argued that if it cannot impose reforms through a fiscal plan over the objections of the governor, "then PROMESA created a toothless oversight board."

Judge Laura Taylor Swain ruled the PROMESA Act gives the board the power to make "binding policy choices" for the U.S. commonwealth despite the governor's objection.

However, when it comes to policy measures dependent on the adoption of new laws or the modification or repeal of existing laws, the board "has only budgetary tools and negotiations to use to elicit any necessary buy-in from the elected officials and legislators," the ruling stated.

While the ruling empowered the board in fiscal matters, it also noted that only the Puerto Rico government can pass laws necessary to implement new fiscal policies.

Swain noted that the PROMESA Act is "an awkward power-sharing arrangement" because Puerto Rico officials 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."

With Puerto Rico sinking under roughly $120 billion in debt and pension liabilities, the board in May 2017 sought a form of bankruptcy restructuring in U.S. court.

Rossello blasted the ruling for giving "total budgetary authority to the unelected members of the oversight board, which supersede that of the elected officials of the Government of Puerto Rico and its legislature."

"While we analyze the possibility of appealing the court's decision, we will keep looking for ways to work with the oversight board so that we avoid harsh, draconian measures that would be detrimental to our people,” he said in a statement.

The oversight board said the ruling upholds its authority and urged the Puerto Rico government to fully implement the fiscal plans and budgets it certified.

"There can be no doubt that the fiscal year 2019 budget certified by the oversight board is the only one and must be enforced," said Board Chairman José Carrión in a statement.

"We call on all stakeholders to get back to work in the interests of Puerto Rico, in order to end decades of mismanagement and rebuild our island.”

While the judge dismissed several counts in the governor's lawsuit largely on technical grounds, she kept other parts alive, rejecting the board's argument that the court lacks jurisdiction over the dispute. Swain dismissed the legislators' lawsuit in its entirety.

(Reporting by Luis Valentin Ortiz in San Juan and Karen Pierog in Chicago; Editing by Daniel Bases and Matthew Lewis)