The fate of the federal oversight board overseeing Puerto Rico's bankruptcy and fiscal recovery plans, and the status of plans already made to reduce bondholder claims and restructure public pension benefits, hung in the balance Tuesday during Supreme Court arguments over whether board members were properly appointed.
Congress created the Financial Oversight and Management Board in 2016 to help restore financial stability, including restructuring $74 billion in bond debt and $50 billion in unfunded pension liabilities. Board members were appointed by then-President Barack Obama from a list compiled by members of Congress but were not confirmed by the Senate.
After bankruptcy proceedings started in May 2017, the constitutionality of the board appointment process was challenged by bondholder Aurelius Investment and a labor union representing electric utility employees, and that challenge was upheld by the 1st U.S. Circuit Court of Appeals in Boston, before winding up at the Supreme Court for expedited review.
The oversight board's position, supported by a retired employees group, some unsecured creditors and the U.S., was argued by former U.S. solicitor general Donald B. Verrilli Jr., who said the appointments clause does not extend to the local government of a territory such as Puerto Rico.
Another former solicitor general, Theodore Olson, argued for Aurelius Investment that the appointments clause does apply because the law creating the board was in response to a national financial crisis and the board's actions have national repercussions for bondholders and others.
The board so far has proposed an adjustment plan allowing Puerto Rico to reduce $35 billion of the debt to $12 billion as it works to exit bankruptcy, as well as an earlier debt restructuring agreement reached with bondholders for Puerto Rico's Sales Tax Financing Corp., known as COFINA.
Both Aurelius Investment and the union want the restructuring deals to date to be voided and the board replaced, which could cause significant delays to Puerto Rico's recovery. "They brought this suit because they want a different board," Mr. Verrilli argued.