U.S. Supreme Court Upholds Financial Oversight Board for Puerto Rico

By Mark Walsh — June 01, 2020 3 min read
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The U.S. Supreme Court on Monday upheld appointments to a federal Financial Oversight and Management Board for Puerto Rico, in a case that was being watched for its impact on the island’s schools and other government services as well as by retired teachers concerned about massive debts the territory has faced in recent years.

The island’s retired teachers are among 167,000 retired public employees represented by an entity called the Official Committee of Retired Employees of the Commonwealth of Puerto Rico. The committee supports the federal oversight board, which was created in 2016 to try to deal with $74 billion in bond debt and $49 billion in unfunded pension liabilities in bankruptcy proceedings.

The board has filed a restructuring plan with a federal district court that would cut some $65 billion of Puerto Rico’s public debt and other liabilities to $12 billion.

Several creditors, however, challenged the makeup of the board because six of the seven voting board members were appointed by then-President Barack Obama from a list provided by the U.S. House and Senate leadership (with the seventh chosen by the president himself). The challengers said the board ran afoul of the appointments clause in Article II of the U.S. Constitution, which requires “officers of the United States” to be nominated by the president and confirmed by the Senate.

The U.S. Court of Appeals for the 1st Circuit, in Boston, agreed that the federal board violated the appointments clause. But that court refused to undo the various actions the board had taken in the previous three years, ruling that it was acting in good faith.

In arguments last fall, lawyers for the board and President Donald Trump’s administration defended the makeup of the board, but also said it would be difficult to unwind three years of actions related to bankruptcy.

In its June 1 decision in Financial Management and Oversight Board for Puerto Rico v. Aurelius Investment LLC (No. 18-1334), the Supreme Court ruled unanimously that the appointments clause applies generally to officers all officers of the United States, including those who exercise power with respect to Puerto Rico. But the court concluded that the appointments clause does not apply to selection of the oversight board members because they exercise mostly local functions in Puerto Rico and thus are not officers of the United States.

Justice Stephen G. Breyer, writing for seven justices, said Puerto Rico was comparable to the District of Columbia, with Congress historically authorizing offices with primarily local responsibilities.

“In short, the board possesses considerable power—including the authority to substitute its own judgment for the considered judgment of the [Puerto Rico] governor and other elected officials,” Breyer said. “But this power primarily concerns local matters.”

His opinion was signed by Chief Justice John G. Roberts Jr. and Justices Ruth Bader Ginsburg, Samuel A. Alito Jr., Elena Kagan, Neil M. Gorsuch, and Brett M. Kavanaugh.

Justice Clarence Thomas concurred in the outcome, and wrote a separate opinion to say he would have applied a different legal analysis than Breyer did.

Justice Sonia Sotomayor wrote an opinion that reads largely like a dissent, in which said she “reluctantly” concurred in the outcome.

“The board members, tasked with determining the financial fate of a self-governing territory, exist in a twilight zone of accountability, neither selected by Puerto Rico itself nor subject to the strictures of the appointments clause,” wrote Sotomayor, who is of Puerto Rican descent and wrote a law review article on Puerto Rican statehood while at Yale Law School.

Her 24-page concurrence recounts the island’s recent challenges, from financial distress to Hurricane Maria in 2017 and recent earthquakes that “have further rattled an already shaken population.”

“The board’s decisions have affected the island’s entire population, particularly many of its most vulnerable citizens,” Sotomayor said. “The board has ordered pensions to be reduced by as much as 8.5 percent, a measure that threatens the sole source of income for thousands of Puerto Rico’s poor and elderly. Other proposed cuts take aim at already depleted health care and educational services. It is under the yoke of such austerity measures that the island’s 3.2 million citizens now chafe.”

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A version of this news article first appeared in The School Law Blog.