On June 30, 2021, the Financial Oversight and Management Board filed its 4th (or 5th) Plan of Adjustment and Disclosure Statement. Although it has received no press in PR, this is significant for several reasons. Not only is it longer by 141 pages but it also has points of interest.
In the section entitled Conditions Precedent to the Effective Date, the new disclosure statement and plan state as to conditions precedent to the effective date:
(xvii) Provide that neither the Governor nor the Legislature shall enact, adopt, or implement any law, rule, regulation, or policy that impedes, financially or otherwise, consummation and implementation of the transactions contemplated by the Plan; and
(xviii) Provide that the Governor and the Legislature, individually and jointly, as appropriate, shall take any and all actions necessary to consummate the transactions contemplated by the Plan.
This language was pointed out by AAFAF in its reservation of rights as to the latest plan. Their point, and a valid one, is that this condition precedent seems to imply that Judge Swain, by approving the plan, is ordering the Commonwealth to legislate the necessary legislation to effectuate the plan, which would include legislation for the issuance of new bonds. Problem is, that nowhere in PROMESA is it specifically spelled out that Judge Swain has that power.
Obviously this new language is precipitated by AAFAF’s own objection to the previous plan, where it said that the Board did not explain how it would get around the Legislature’s refusal to legislate if the plan included pension cuts. The Board, upped the ante by specifying what it implied with requesting an order pursuant to Section 305 of PROMESA. To this controversy we have to add the Board’s complaint to invalidate law 7-2021, which it says is contrary to PROMESA for it includes a plan of adjustment where bondholders receive less and the Legislature prohibits the Government from supporting a plan that includes pension cuts. Since the case was filed last Friday, it will not be decided by the time the disclosure statement approval hearing is held on July 13, 2021.
This is nothing short of a mess. The Legislature has challenged the Board, saying it will not approve legislation if the plan of adjustment includes pension cuts, which it does, modest as they may be. AAFAF warned the Board of this, requiring an explanation of how it would deal with it and the Board did just that. It is an open question, in my opinion, whether Judge Swain would agree to order the Government and Legislature to enact the legislation or to otherwise waive the requirement of said legislation. If she does not, however, the plan cannot be confirmed and pursuant to 11 U.S.C. § 930, the Title III would be dismissed. The question is whether the Government or Legislature is willing to risk said dismissal.
I am sure the Governor would not risk it but the Legislature is not controlled by his party. The House is in the hands of the Popular Democratic Party and has a plurality in the Senate. Both Legislative presidents have, in my opinion, an eye on their party’s candidacy for Governor. Hence, it is entirely possible that they could, with the battle cry of “No Cuts to Pensions” let the Title III be dismissed and blame the Governor.
On the other hand, will Judge Swain let 5 years of PROMESA go down the tubes because of party politics? Your guess is as good as mine.