The Trump administration is being accused of playing politics with Puerto Rico’s economic recovery by attempting to remove multiple members of a financial oversight board created by Congress to restore the U.S. territory’s fiscal stability.
President Donald Trump’s decision to fire five of the board’s seven members after right-wing activist Laura Loomer criticized its spending habits has already led to a high-stakes court battle.
It also renewed fears about the fragility of Puerto Rico’s economy and the nearly decadelong grip the board has had on the island. At the same time, it has shed light on a group of bondholders trying to squeeze as much money as possible out of the territory, actions that could undo years of progress by the board.
Earlier this month, U.S. District Judge María Antongiorgi-Jordán ruled the Trump administration overstepped its authority when it unceremoniously fired members of the financial watchdog. Of those relieved of their duty, three — Andrew Biggs, Betty Rosa, and Arthur Gonzalez — sued to be reinstated. They argued they were fired in a two-sentence email that didn’t show cause.
The judge agreed.
“In this case, the President attempted to remove Plaintiffs from the Oversight Board without even attempting to articulate a ‘cause’ for the attempted removals,” Antongiorgi-Jordán wrote in a 34-page decision. “That action was plainly contrary to law.”
The government has 90 days to appeal.
“Donald Trump’s purge of the Financial Oversight and Management Board for Puerto Rico (FOMB) exposed the deep ties between the president and vulture funds that see opportunity in the suffering of some of the poorest American citizens in this nation,” U.S. Rep. Nydia Velázquez (D-NY) told the Washington Examiner. “The fact that extremists like Laura Loomer are influencing these decisions should alarm anyone who values the integrity and fairness of bankruptcy proceedings. Puerto Rico is the one suffering today, but tomorrow it could be any jurisdiction — Democrat or Republican.”
Puerto Rico is under U.S. congressional control, though the island has a local government with an elected governor. Congress has plenary authority, meaning unlimited power, and can override Puerto Rican laws. The president plays a significant role, especially when it comes to appointments.
Trump could appoint new board members who are friendly to bondholder concerns. If that happens, and the bondholders get billions more than the board says Puerto Rico can afford, it could devastate the island, Charles Venator Santiago, an associate professor of political science at the University of Connecticut, told the Washington Examiner.
“The whole thing is just full of contradictions,” Santiago said. “We have to figure out what Trump is going to do with these new appointments, and whether he’s going to follow the law.… Is he going to stack it with people that are friendly to his agenda?”
Trump’s ultimate intentions in Puerto Rico are far from clear, Santiago said.
“If the goal is to build an economy, the status quo economy benefits a lot of wealthier investors that are buying land in Puerto Rico, that are investing in Puerto Rico. If you want to keep that going, you need to have a stable economy. And simply paying off the vulture funds is not going to guarantee you a stable economy. Secondly, if you keep destroying the economy, you’re going to have a flood of exile, of Puerto Ricans, coming to the mainland.”
Economic nosedive
A mix of long-standing and complex factors — from shifts in the federal tax code and international trade deals to the global financial crisis and Puerto Rico’s declining competitiveness in key industries — has eroded the island’s economic foundation, creating structural deficits that ultimately spiraled into a full-blown fiscal and economic crisis.
The government of Puerto Rico was unable to pay its debts, fulfill its pension commitments to public employees, and sufficiently support essential public services due to ongoing deficits and out-of-control borrowing. For an island with 3.3 million residents and a consolidated budget of $28 billion, government cash reserves fell to as little as $15 million by 2017.
Nearly half of Puerto Rico’s debt was accrued through capital appreciation bonds, payday-loan style, underwritten by Wall Street firms with interest rates exceeding 700%.
“Banks charged excessive fees through ‘scoop and toss’ re-financings, capitalized interest, and auction-rate securities, practices that transformed interest into new principal and guaranteed profits for underwriters,” Jose Atiles, author of Crisis by Design: Emergency Powers and Colonial Legality in Puerto Rico, said. “Hedge funds then purchased these instruments at steep discounts, blocked restructuring agreements, and litigated aggressively, extracting concessions even in the aftermath of disasters like Hurricane María.”
The limited cash on hand also created a crisis that caused the government to freeze public employee wages, raise taxes on residents, underfund its retirement system, cut supplies to hospitals and public schools, and hand off maintenance on energy and water systems.
Puerto Rico’s inability to provide residents with basic services led to people leaving the island in droves, causing the biggest outmigration in the island’s history. The population drop of more than 10% was one of the largest in a century from any U.S. state, territory, or municipality.
A lifeline
Puerto Rico was in a tough spot because it could no longer pay back what it had borrowed or file for bankruptcy because it was a commonwealth. The island was on the brink of economic free fall when Congress threw it a lifeline.
The Puerto Rico Oversight, Management, and Economic Stability Act established a bipartisan panel of experts to represent Puerto Rico in court and help balance the island’s budget.
Former President Barack Obama signed off on the legislation on June 30, 2016.
The members of the board got paid no money and acted on behalf of the commonwealth while representing it in court against collectors.
In addition to establishing a financial oversight and management board, PROMESA enacted an aggressive, comprehensive process for restructuring Puerto Rico’s debt and fast-tracked procedures that helped improve critical infrastructure projects.
But in the middle of trying to get Puerto Rico back on its feet, the island was hit with catastrophic natural disasters and the pandemic. Despite this, the board completed the largest public debt restructuring in U.S. history, reducing the debt from $34 billion to $7.4 billion.
La junta backlash
Not everyone was overjoyed by the actions of the oversight board, known locally as “la junta.” It has been criticized not only by bondholders but also by residents and local leaders.
The board has been accused of being too strict about what the island can afford and what programs it cannot. One member defended the board’s actions to the Washington Examiner, saying Puerto Rico had been fiscally reckless for decades and needed to be reined in.
Legally, the board can veto budgets and contracts, which local lawmakers claim pushes them out of the process. Puerto Rican residents, who already have a limited voice in Congress, have seen the board as an insult to their self-governance, Luis Martínez-Fernández, a history professor at the University of Central Florida, told the Washington Examiner.
But Santiago thinks the tides are turning and more people are starting to embrace the work of the board.
“I think it’s a question of trust in government,” he said. “I don’t want to say people love the board, but they’re also realizing that it’s a better alternative to the current government, or the past three governments, which have all been pro-state.”
The board will hand over control when Puerto Rico can balance the budget on its own for four years — a milestone yet to be reached.
PREPA
One major restructuring project left for the board involves Puerto Rico Electric Power Authority, the territory’s struggling power utility. Ultimately, it is a complex financial fight between hedge funds, muni bonds, bond insurers, and the island.
It’s no secret that PREPA, even in the best of times, has been unreliable and expensive. When Hurricane Maria hit in 2017, it damaged over 80% of its electrical grid.
Pre-dismissal, the board pushed back heavily on bondholder demands that Puerto Rico pay $8.5 billion of principal plus interest, which comes to roughly $12 billion. The board argued that Puerto Rico’s electricity rates are already among the highest in the country, while the median household income is half that of Mississippi, the poorest state in America. If Puerto Rico were forced to pay off PREPA’s debt in full, it would increase energy rates more than 30% in an area that already has the second-most expensive energy rates in any U.S. jurisdiction, the board said. Hawaii is first.
There have been allegations that bondholders are pressuring the Trump administration to replace board members with individuals more sympathetic to their demands.
Loomer’s sudden interest in Puerto Rico’s debt restructuring also raised eyebrows, prompting accusations that she was acting on behalf of outside parties with a financial stake in the process. She has denied those claims. Still, just days after she publicly criticized the board, Trump dismissed most of its members.
Attempts by the Washington Examiner to reach Loomer for comment were unsuccessful.
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A test case?
Santiago worries that Trump’s firings of Puerto Rico’s oversight members could be part of a bigger plan to test his power over local boards.
“He might decide to just put all his people in and disregard Democrats and see where that goes, even if it’s a violation of law,” he said. “And that would be a test case that could be replicated elsewhere. It wouldn’t surprise me if he appoints people who are going to pay off the bondholders at a $12 billion rate and then see what happens, and not necessarily look back.”
