13:12 GMT12 July 2020
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    A massive setback for the holders of Puerto Rico’s delinquent debt, a US federal court has ruled that Congress’ oversight of the island’s finances is constitutional and will continue – meaning strict austerity for the struggling US territory for years, if not decades, to come.

    Kristian Rouz — A federal judge ruled Friday that Puerto Rico's bankruptcy would proceed, as the process of appointing members of its fiscal board was not improper. The ruling comes in response to a lawsuit filed by Aurelius Investment — a major holder of Puerto Rican bonds, which claimed that appointments to the island's main fiscal body had contradicted US law.

    District Judge Laura Taylor Swain reaffirmed that the oversight of Puerto Rico's finances by Congress does not violate the Constitution. Judge Swain said that the direct appointment of fiscal board members by the Congress is legal, as Puerto Rico is not subject to the constitutional Appointments Clause — as the island is a US territory, not a state.

    The board is appointed under a 2016 federal law — known as PROMESA — to oversee and improve Puerto Rico's finances. Under the PROMESA law, the board can seek restructuring, refinancing and bankruptcy on certain types of Puerto Rico's liabilities.

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    Aurelius had alleged that Congress' action to impose strict fiscal discipline on the struggling territory constituted a federal overreach and that the bankruptcy case under PROMESA is therefore void. But Judge Swain ruled otherwise.

    "The oversight board's statutory objectives and scope of authority thus mark its character as territorial rather than federal," the court ruling read.

    Judge Swain also said that Puerto Rico's fiscal board members are not federal officials, but rather territorial officers appointed by Congress in line with the Territorial Clause. This means, the ruling said, that the process of appointments does not fall under the Appointments Clause.

    "Under the premise advanced by Aurelius, Congress is incapable of both creating and filling a territorial office or entity. Rather, the only officers who may be considered ‘territorial' are those who are popularly elected by the residents of a federal territory," Judge Swain said. "Popular elective authority in territories of the United States derives from Congress, which explicitly states in PROMESA that it has exercised its own power to create a territorial entity."

    The ruling is a major setback to Aurelius and other holders of Puerto Rico's delinquent debt, including the Irrigation & Electrical Workers Union. The island's fiscal problems started back in 2015, when the territorial government failed to service its huge debt, accumulated over previous years of mismanagement, elevated social and utility spending, and shrinking budget revenue.

    Puerto Rico bond holders have hoped for a federal bailout, but the GOP-dominated Congress decided that the island should not solve its fiscal problems at the expense of US taxpayers. The PROMESA law established a clear and market-oriented pathway to fiscal health for Puerto Rico, even though it could mean years or even decades of strict austerity.

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    The Congress-appointed fiscal board consists of seven voting members, as well as the Governor of Puerto Rico as a non-voting member. The board's mission is to improve the island's finances by cutting budget expenditures, liquidating its assets and decreasing its debt burden.

    With its dismissed lawsuit, Aurelius had targeted specifically the bankruptcy case involving the island's $120-billion pension debt. The fiscal board determined back in May 2017 that Puerto Rico is effectively in default on its pension liabilities, triggering the ongoing Title III bankruptcy.

    "As stated in Judge Swain's opinion, PROMESA empowers the Oversight Board to ‘approve the fiscal plans and budgets of the Commonwealth and its instrumentalities' and ‘override Commonwealth executive and legislative actions that are inconsistent with approved fiscal plans and budgets,'" the fiscal board said in a statement following the court ruling.

    However, Puerto Rico's fiscal policies are far from full austerity, as rife mismanagement and corruption continues to plague the once-flourishing island. A Bloomberg report earlier this month found that Puerto Rico's bankrupt utility company, Puerto Rico Electric Power Authority (PREPA), had hired a new CEO with an annual salary of $750,000.

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    This comes as PREPA is mired in bankruptcy proceedings over its $9-billion delinquent debt.

    The report triggered public outrage and a massive scandal, resulting in the resignation of PREPA's CEO, which left the company leaderless.

    Meanwhile, both policymakers and observers are predicting a strict governmental austerity for the years to come, whilst the US Congress is working to further tighten its oversight of Puerto Rico's finances and overall economic governance.


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