After Governor García Padilla’s not so surprising claim that the island cannot pay its debts, there has been much discussion of Financial Board. There is some confusion, however, of which Financial Board and who would create it. There is one Financial Control Board, similar to the one Congress imposed on the District of Columbia and the usual questions of its constitutionality and applicability to Puerto Rico. Then there is a Financial Board that the Puerto Rico Government wants to create, with questions as to its constitutionality and the extent of its powers. The Financial Board to be created by Congress has the full power of federal government behind it and a successful precedent in DC, whereas the local Financial Board has no precedent in the island or the US for that matter.

Puerto Rico wants to convince Washington that by creating a Financial Control Board, they are making the necessary reforms to put PR on the right track. This would address the concerns, in part they claim made Representative Goodlatte and Senator Chuck Grassley, arguably now the most important person on the PR debt debate. On June 29, 2015, the Governor gave his speech claiming that the island’s debt could not be paid. He also said he would create Fiscal Board that, outside of party lines, guarantees the continuity and compliance with the agreements in this restructuring process. His speech followed the Kruger Report, at page 22, recommendation 36 to create such local Board. This was followed by GDB Chairperson Melba Acosta short speech, which expounded on Dr. Krueger’s report and the local Board.

PR wants to create, by law, an extra-governmental Financial Board that would require the Government, by law, to re-negotiate the debt with bondholders. In other words, if the Legislature fails to pass laws to which the Government and Bondholders agree, the Financial Board will force it to pass these law; if the Executive does not enforce the agreement, the Financial Board will enforce it. It is important to note, that as conceived, this Board would not be the one restructuring the Government but rather a super-oversight entity that would be above the Government as spelled out by the Constitution.

Also, the persons appointed to this Board will be outside political cycles, which means their appointments will be for more than 4 yours, possibly the 10 years of several ombudsmen created by law. The Financial Board as conceived and sold to Washington, however, has several constitutional and practical problems.

Article I, Section Two of Puerto Rico’s Constitution states that the island will have a republican form of government. This means, among other things, the separation of powers between the three branches of Government, the Executive, the Legislative and the Judicial, see, Misión Industrial v. Junta de Planificación de Puerto Rico, 146 D.P.R. 64 (1998) and Guzmán Vargas v. Calderón, 164 D.P.R. 220 (2005).

The Executive is entrusted with enforcing the law, hence, the Governor is called to make sure any agreement with Bondholders that is enacted into law is enforced. The Legislature is entrusted by the Constitution with enacting the budget. Hence, Financial Board, not created by the Constitution, cannot decide whether this budget is in accordance with the Bondholders’ agreement. Finally, the determination of the meaning and extent of a law is a quintessential judiciary function, delegated by the People of Puerto Rico into its Supreme Court. A Financial Board, not created by the Constitution, cannot determine whether the actions of a government agency or the legislature violate a Bondholder’s agreement for that function is constitutionally delegated to the PR Supreme Court.

In addition, the Republican form of government and hence the separation of powers, cannot be altered. Article VII, section 3 states that “[n]o amendment to this Constitution shall alter the republican form of government established by it or abolish its bill of rights.” This section is incorporated into the Constitution because section 2 of Law 600 which allows PR to write it, says that the “constitution shall provide a republican form of government and shall include a bill of rights” Since this was a requirement for the Constitution to be written, there is no possible way to amend this section.

As readers of my postings know, I am in favor of a Financial Control Board a la DC. There has been some comment, however, that Congress does not have the power to impose a Financial Control Board on PR. Detractors have mentioned the especial status of the District in the Constitution and that PR is akin to a state. I always answer “examine the Constitution and compare.” Article I, Section 8, clause 17 of the Constitution states that Congress has the power:

“To exercise exclusive legislation in all cases whatsoever, over such District (not exceeding ten miles square) as may, by cession of particular states, and the acceptance of Congress, become the seat of the government of the United States.”

Article IV, Section 3, Clause 2 of the Constitution states as follows as to territories:

“The Congress shall have power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States. “

Also, during the oral argument in the First Circuit on the Recovery Act, Thomas Moers Mayer, who argued for Franklin, was asked by Judge Lynch whether Congress had decided to keep the power to decide when and at what time PR would be eligible for Chapter 9 and if Congress does not act, Judge Torruella’s no man’s land scenario would come into effect. She continued by saying that PR had asked Congress for inclusion in Chapter 9 and that Congress had many options and Meyer agreed; Chapter 9 or others. Martin Bienenstock, representing Melba Acosta and the GBD, in his rebuttal turn, basically argued that PR was different than DC, that it was a Commonwealth, that Congress had approved a Constitution and had police power. Judge Lynch did not seem very convinced and asked “what is your point with all this”. Bienestock answered that Washington did not have police power but PR did. Whether that is true, Judge Lynch did not sound convinced. Judge Lynch wrote the opinion of the First Circuit on July 6, 2015 and essentially opened the door to a Financial Control Board see opinion at pages 30-31.

There are practical considerations that weight against this type of Board created by the Puerto Rico Government. In all cases where a financial board have been established, New York City, Philadelphia, and Chicago to name a few, have been made by the state government to oversight on a city. It is pellucid that municipalities are creatures of the state and whose existence depend on it, see, Coleman v. Miller, 307 U.S. 433, 441 (1939). Something similar occurred when Congress established the DC Financial Control Board. Here, there is no superior power to impose a Board. Only Congress can establish such a Board for PR. We must remember that PR cannot amend its Constitution to eliminate the Republican form of Government because this was a Congressional requirement that cannot be altered and therefore the separation of powers cannot be eliminated or altered.

In addition, the likelihood of politicians and politicians’ cronies being appointed to the Board is very high. How can Bondholders rely on such a political Board? Also, since one legislature cannot compel a subsequent legislature, see, Pueblo v. Tribunal de Distrito, 70 DPR 678, 679-80 (1949) and Córdova v. Cámara de Representantes, 171 DPR 789 (2007), this Board can be eliminated or altered by the next government. No permanence is possible in our political arena as it not possible in Congress.

In synthesis, this local Financial Board cannot do what Governor García Padilla says it will do. It is nothing more than an attempt to force bondholders to accept a haircut. In this regard, it is similar to the “quiebra criolla” (Recovery Act). Therefore, the best way to guarantee that any agreements are honored would be a Congressional Financial Control Board to put Puerto Rico’s house in order, including requiring the PR Government to adhere to existing contracts with creditors.