MOST AMERICANS know Puerto Rico as the scene of the worst humanitarian and economic disaster of our nation’s recent history, Hurricane Maria, which devastated the island in September 2017 and from which it has yet to recover completely.
Just before that, though, Puerto Rico had been the focal point of a far more hopeful development: a rare piece of legislation enacted by Congress in 2016 with the goal of pragmatically addressing a real-world problem on a bipartisan basis. The Promesa Act (the acronym equates to the Spanish word for “promise”) admittedly responded to another crisis on the island: its enormous debt, made up of borrowings and unfunded pension liabilities totaling roughly $130 billion. Yet the basic solution — a bankruptcy-like debt workout led by a board of financial experts and supervised by an impartial federal court — offered Puerto Rico a chance to reform its government and resume growth. The hurricane obviously set debt restructuring back, but the process has resumed and continues to progress. Indeed, disaster recovery and financial stability are interdependent.
Now, however, there is a man-made disaster looming, in the form of a Feb. 15 federal appeals court ruling declaring the Financial Oversight and Management Board that Promesa created unconstitutional. The decision represents a strange meeting of the minds between a doctrinaire three-judge panel of the U.S. Court of Appeals for the 1st Circuit and creditors of the U.S. commonwealth — led by hedge fund Aurelius Investment LLC and bond insurer Assured Guaranty Corp., which are betting that the overthrow of the Promesa board will enable them to demand a better payout.
The creditors argued the board and its debt-reduction actions to date are illegitimate because its members were chosen by a special process, prescribed in the Promesa Act, involving both houses of Congress and the president — rather than by presidential appointment with Senate confirmation. In a fit of constitutional persnicketiness, the 1st Circuit agreed, brushing aside the board’s argument that the Promesa Act appointment process was perfectly constitutional in light of Congress’s broad authority to legislate for federal territories such as Puerto Rico.
The court portrayed the Financial Oversight and Management Board as an affront to Puerto Rican autonomy — “more like Roman proconsuls picked in Rome” — a flight of political rhetoric that was especially inappropriate given that the island’s elected government, opposition party, major interest groups and many creditors all submitted briefs in support of the board.
Fortunately, the ruling does not retroactively undo the debt restructuring achieved so far, but it does becloud the future, because the court gave the president and the Senate only 90 days to “reconstitute” the board. Given the difficulties of dealing with the White House and Capitol Hill, that deadline may prove impossible to meet. The board has announced its intention to instead seek relief from the Supreme Court — which, if it cares about both Puerto Rico’s future and sensible constitutional interpretation, will grant it.