Who's in Charge of Puerto Rico? A Manhattan Judge Gets to Decide

  • Basic questions of governance surface in fight over utility
  • While politicians spar, hurricane recovery crawls forward
Trump Rates Himself a 10 Out of 10 on Puerto Rico Aid

Who runs Puerto Rico: Its elected governor or financial overseers named by Congress?

That’s the ultimate question in a court battle that will erupt in Manhattan on Monday, two months after Hurricane Maria devastated the bankrupt U.S. commonwealth. The immediate dispute before U.S. District Court Judge Laura Taylor Swain is over who holds the power to rebuild the storm-ravaged electric system known as Prepa. But the case reflects broader tensions about who will lead a disaster recovery that has been confused and inadequate, and who will control the effort to settle the island’s $74 billion of unpayable debt.

Ricardo Rossello

Photographer: Kevin Dietsch/Pool via Bloomberg

The fight between Governor Ricardo Rossello and the panel created to deal with the financial crisis is the latest and most momentous episode in a conflict that peaked last month when the panel appointed an emergency manager for Prepa. Rossello is bitterly contesting that move, saying in court filings that if the judge approves the appointment, the board also could replace him and other elected officials.

“It’s a power struggle,” said John Mudd, a San Juan bankruptcy and constitutional lawyer. “The governor wants the credit, the board wants to control the money. That’s the real issue. Who is in control? If Puerto Rico administers the funds, there is going to be a lot of corruption, that’s a given. But they are elected officials.”

Fleeing Home

Meanwhile, Puerto Rico is losing valuable time, with its 3.4 million U.S. citizens still largely in the dark. Many are leaving instead of waiting for the power to come back on, with some estimates suggesting as many as 100,000 have fled to the mainland already. That will make economic recovery all the more difficult.

Puerto Rico lost the uncontested ability to manage its affairs last year. Facing its untenable debt load, Congress allowed it to declare a form of bankruptcy, which it did in May. In exchange, lawmakers installed the Fiscal Oversight and Management Board to end years of borrowing and overspending.

Read more: How Puerto Rico managed to dig a deep financial hole - QuickTake

Its seven voting members, appointed by former President Barack Obama from a bipartisan list supplied by Congress, meet primarily in New York and San Juan. They’re charged with overseeing a road map for long-term financial recovery, identifying spending cuts and proposing debt-adjustment plans to the bankruptcy court.

A Puerto Rico Electric Power Authority worker repairs electrical infrastructure in Canvanas on Oct. 10.

Photographer: Alex Flynn/Bloomberg

But it hasn’t been clear where the board’s authority ends and the government’s begins. Friction erupted this year when the panel ordered Rossello to furlough workers and eliminate Christmas bonuses, an order the governor ignored. The board sued him to enforce the measure, though it pulled that lawsuit after the hurricane struck on Sept. 20. The governor and the board put on a united front in the wake of a disaster that killed at least 55 people.

Final Blow

That comity ended with the fight over Prepa. 

The utility is essential to Puerto Rico’s stability, and electricity is the recovery’s central obstacle. Even before the storm, bondholders argued for an outside receiver, saying managers appointed by governors and ratified by legislatures had badly mismanaged the system. Prepa relies on costly oil to make electricity, which was widely pirated. It didn’t collect enough money to keep up with basic maintenance, much less upgrade the system. Debt used for operations instead of improvements contributed to the decline.

Then, Maria toppled the flagging system. Restoration has proceeded at a crawl. On Sunday, the commonwealth reported it was generating only 48 percent of power needed.

The board’s installation of its own emergency manager was triggered last month by the revelation that Prepa had entered into a $300 million contract with a little-known Montana company. Whitefish Energy Holdings had only two employees and few evident qualifications other than requiring no upfront payment.

The contract called into question the ability of Puerto Rico’s government to administer the billions in federal funds it will receive. The board demanded power of approval over any contract worth $10 million or more.

“Instead of trying to partner and collaborate with the government in recovery, they’re trying to take over,” said Christian Sobrino, the governor’s nonvoting representative on the oversight board. “They’re trying to take advantage of the situation, and that also hinders recovery efforts.”

Power Move

The controversy is the result of chaos, said Rafael “Tatito” Hernandez, a lawmaker who is a bitter opponent of the governor and a board takeover alike. Rossello, he said, “is showing he doesn’t have control over the island.”

But in a filing to the U.S. court, Rossello’s lawyers told Judge Swain that giving the board authority to replace Prepa’s managers means the panel also can replace any representative chosen by the people.

“Nothing would stop the oversight board from taking direct control over any of Puerto Rico’s governmental and political functions and by fiat replacing the governor and even displacing the legislature,’’ they wrote.

The board says that’s an exaggeration, but argued in court papers that Congress granted it power to do everything necessary to repair finances, from writing the island’s annual budget to ignoring any Puerto Rico law that conflicts with its mandate. With a few exceptions -- such as imposing martial law and pardoning convicts -- the board claims it can wield almost every power Rossello possesses.

“So long as the commonwealth lacks a fully professionalized government, local political dynamics will interfere with federal efforts to set the island on a more sustainable course,” Matt Fabian, a partner with Municipal Market Analytics, said in an email. “This tension is not going away.”

These issues are likely to arise at other events this week. Rossello is set to testify before Congress on Tuesday, and residents can voice their concerns about the debt restructuring Thursday at a board hearing in San Juan.

Meanwhile, Puerto Rico’s hospitals still rely on generators, its businesses remain shuttered and its roads uncleared. When night falls, millions are left to wonder in the dark whether they have been forgotten.

“This is our future,” said Jose M. Umpierre, a writer and former University of Puerto Rico public-health professor who made a documentary about the bankruptcy. “I don’t like the board, but I am angered by the lack of competence and the mismanagement.”

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