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Notes from the Puerto Rico Oversight (Not Control) Board 34Th Pileggi Lecture University of Pennsylvania Carey Law School Penn Law: Legal Scholarship Repository Faculty Scholarship at Penn Law 2019 Notes from the Puerto Rico Oversight (Not Control) Board 34th Pileggi Lecture David A. Skeel Jr. University of Pennsylvania Carey Law School Follow this and additional works at: https://scholarship.law.upenn.edu/faculty_scholarship Repository Citation Skeel, David A. Jr., "Notes from the Puerto Rico Oversight (Not Control) Board 34th Pileggi Lecture" (2019). Faculty Scholarship at Penn Law. 2108. https://scholarship.law.upenn.edu/faculty_scholarship/2108 This Article is brought to you for free and open access by Penn Law: Legal Scholarship Repository. It has been accepted for inclusion in Faculty Scholarship at Penn Law by an authorized administrator of Penn Law: Legal Scholarship Repository. For more information, please contact [email protected]. NOTES FROM THE PUERTO RICO OVERSIGHT (NOT CONTROL)BOARD 34TH PILEGGI LECTURE DAVID SKEEL* PREFACE Likeother bankruptcyscholars, Iamdrawntofinancial crises, where#er they occur.When *uerto )ico’sdistressdeepened andthe island passed itsown municipalbankruptcylaw back in 2014,Ididwhat comes naturally,shiftingmygazetothe Caribbean. Iwrote op-eds, an amicus brief, and ashort white paper,and Istarted research foralaw review article,ineachcasetellingcourtsand Congress how they should respondtothe loomingfinancial catastrophe.1 Iwas bold andconfident, as lawprofessors so oftenare.Sweeping proposals come easywhen you 1now youwon’t be one of thepeoplema1ingdecisions and wrestlingwith real worldcompromises.2 Then suddenly,Iwas. After Congressenactedthe Puerto Rico Oversight,Management, and Economic Stability Act, or PROMESA,3 Ifound myself in themidst of an intensivevetting processthat landed me on theseven-member FinancialOversight and ManagementBoard forPuertoRicoonAugust 31, 2016. Ihad beenpluckedfromthe comfortable confines of academia and thrustintothe middle of *uerto )ico’seconomiccrisis. Isoon discovered arealitythatisobvious to everyone otherthanascholar: actually making decisions that haveanenormous impact on thelives of ordinary menand womenisalotharder than talkingabout them. Fortunately, theother Board members had decades of practical experience, includingstintsleadingthe Government Development Bank in *uerto )ico; actingas!alifornia’sstate budgetdirector; wor1inginthe * S. Samuel ArshtProfessor of CorporateLaw,University of Pennsylvania.Iam grateful to Breana Barker,Colleen Degnan,Bruce Grohsgal, PaulRegan, andZacharyJ. Schnapp forhelpful commentsand assistance,and to thePileggi family fortheirhospitality. 1 See, e.g., DavidSkeel, 9i?ing *uerto )ico’sDebt 6ess,WALL ST.J., Jan. 5, 2016 (advocatingabankruptcyframework forPuerto Rico); BriefAmici CuriaofClayton P. Gillette &David A. Skeel,Jr., Puerto Rico v. Franklin Cal. Tax-Free Tr., (2016) (Nos.15-233,15-255) (urgingthe Supreme Courttoupholdthe RecoveryAct of 2014); ClaytonP.Gillette&DavidA.Skeel,Jr., ATwo-StepPlanfor Puerto Rico 6, 12 (Univ. of Pa. Inst.for L. andEcon.,Working PaperNo. 16-3,2016)https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2728466(callingfor Congress to enact restructuringprovisions andacontrolboard). 2 Theimpracticalityofscholarly writinghas oftenbeenpointed out,mostfamously by Judge Harry Edwards. Harry T. Edwards, The GrowingDisjunction BetweenLegal Education andthe Legal Profession,91MICH.L.REV.34, 35 (1992). 3 Puerto Rico Oversight,Management,and Economic StabilityAct (PROMESA), Public Law114-187,130 Stat.549 (2016) (codified at 48 U.S.C. §2101 (2016)). 529 530 DELAWARE JOURNAL OF CORPORATE LAW VOL.43 Social Security Administration, running an insurance company, and servingasafederaljudge.4 My colleagues were and are aremarkable team. This essay, whichbeginswhereanearlier essayconcluded,5 chroniclesthe Board’seffortstohelprestore “fiscalresponsibility and accesstothe capitalmar1ets” for *uerto )ico; as *)+6ES" instructsus to do.6 Ibegin with abrief s1etch of thedepth of *uerto )ico’s economic distress,which hadplagued PuertoRicofor adecadewhen Hurricanes Irma and Mariahit in 2017,and of theprincipal responsibilities vested in theOversight Board by PROMESA. Ithen surveythe majordecisions the Oversight Board hasmade3or in some cases, unsuccessfullytried to make3andthe challengesthat remain as thecurrent Board members near theend of our three-year term. Needless to say, theOversight Board is only oneofmany participants in *uerto )ico’sreco#eryeffort.The Go#ernor;*uerto )ico lawmakers,disasterreliefworkers, ordinarycitizens, and others have takensometimesheroicmeasures to alleviatethe distress.Ifocusonthe Oversight Board becauseitisthe participant Iknowbest. Iwillbe ob2ecti#ewhere Ican and candidwhere Ican’t. 4 See PressRelease, PresidentObamaAnnounces theAppointment of SevenIndividuals to theFinancialOversightand Management Boardfor Puerto Rico (Aug. 31,2016), https://obamawhitehouse.archives.gov/the-press-office/2016/08/31/president-obama- announces-appointment-seven-individuals-financial (describingeachofthe Boardmembers). 5 DavidSkeel, Reflections on TwoYears of P.R.O.M.E.S.A.,87REVISTA JURIDICA UNIV.P.R.862 (2018). 6 48 U.S.C. §2141(b)(1)(2016). 2019 NOTES FROMTHE PUERTO RICO OVERSIGHT 531 (NOT CONTROL)BOARD TABLE OF CONTENTS I. PUERTO RICO4S DISTRESS:JUNE 30, 2016 ........................... 532 II. THE OVERSIGHT BOARD4S POWERS AND RESPONSIBILITIES .............................................................................................. 533 III. THE PROGRESSTODATE ...................................................... 535 IV.THE CHALLENGESTHATHAVE EMERGED ............................ 541 A. TheLimits of ourPower............................................. 542 B. TheDownside of EssentialFederal Disaster Relief .................................................................................... 544 C. TheAppointmentsClauseChallenge......................... 546 V. LOOKING FORWARD ............................................................. 548 532 DELAWARE JOURNAL OF CORPORATE LAW VOL.43 I. PUERTO RICO4S DISTRESS:JUNE 30, 2016 By June 30, 2016, when PROMESA waspassed, PuertoRicowas in itstenth year of recession.7 Thecrisiscannotbeattributedtoany single factor,but aworkableshorthand is that from 1996 to 2006 Congress phased out atax breakthathad luredpharmaceutical companies and other light manucsfIHK`QbIO2HdKIO 0`fO$ sQe2HdKIO 0`fO4J]s9Rs^dKJ borrowedmoneyrather than decreased spending to fill thegap.8 Puerto Rico endedupwithmorethan$70 billionindebt and more than $50 billion of unfunded pension benefitsEalmost twiceits annual GNP.9 Thedistressisnot limitedtounsustainable debt; only40% of Puerto Ricans participate in theformaleconomy, as compared to roughly62% in theU.S. as awhole.10 Moreover, about 30%ofthose whodoparticipate `Q 2HdKIO0`fO4JcOKRs]dfOQOR7 9OK^ cor thegovernment.11 Therateof participation in theprivate workforceisthusconsiderablylower. Poverty also is devastatingly widespreadinPuertoRico. In theU.S. as awhole, roughly13% of thepopulationlives in poverty (which obviouslyisway toohigh).12 Butthisisnothing by comparison to Puerto Rico, where thepoverty rate is 43.5%.13 7 Eshe Nelson, *uerto )ico’seye-popping economicsituation,incharts, QUARTZ (Sept. 30, 2017), https://qz.com/1091341/puerto-ricos-eye-popping-economic-situation-in-charts/. 8 See, e.g., DianeLourdes Dick, U.S. TaxImperialism in Puerto Rico,65AM U. L. REV.1,76F78 (2015) (describingrepealofsection936). 9 See, e.g., FIN.OVERSIGHT AND MGMT.BD. FOR P.R., NewFiscal Plan forPuerto Rico,13(Oct. 23, 2018), https://drive.google.com/file/d/17ca0ALe7vpYn0jEzTz3RfykpsFSM0ujK/view(hereinafter NewFiscal Plan). 10 See, e.g.,JoseB.Carrión &Andrew G. Biggs, Don’tblame *uerto )ico’spoor economyonhurricanes,WASH.POST (Dec.172018), https://www.washingtonpost.com/opinions/dont-blame-puerto-ricos-poor-economy-on- hurricanes/2018/12/17/206a5734-f181-11e8-9240- e8028a62c722_story.html?utm_term=.b246ec610713. 11 See, e.g.,COMMONWEALTH OF P.R.,DEPT. OF LABOR AND HUMAN RES., Puerto Rico Economic Analysis Report 2015-2016 at 20 (statinggovernment is 25.6%ofnon-farm employment,with educationand health services listed separately). 12 See, e.g.,KAYLA FONTENOT,JESSICA SEMEGA &MELISSA KOLLAR, Income and Povertyinthe United States:2017,U.S.CENSUS BUREAU (Sept. 2018), https://www.census.gov/content/dam/Census/library/publications/2018/demo/p60-263.pdf. 13 See, e.g.,DATA USA: PUERTO RICO &UNITED STATES, https://datausa.io/profile/geo/puerto-rico/?compare=united-states(last visitedMar.26, 2019) (comparing Puerto Rico andthe U.S. as awhole). 2019 NOTES FROMTHE PUERTO RICO OVERSIGHT 533 (NOT CONTROL)BOARD Giventhesestatistics, andthe fact that allisneededtotake up residence in OrlandoorNew York is aone-way plane ticket,itisnot surprisingthatsomany Puerto Ricans areleaving Puerto Rico. Puerto Rico haslost 10%ofits populationsince 2007,and our demographer predicts 10%morewillleave in thenextfiveyears.14 Thesedepartures include many critically important doctors andnurses, as well as a disproportionate percentage of theyounger PuertoRicansthatthe island needs to providethe foundationfor thenextgeneration.15 2dON]d9aO asGdQ4IcO]]O9deIadJd edGd]ONRdQIJf]OJd]7 OcIdQ assumethe crisis was caused by HurricanesIrmaand MariainSeptember p!qj# -a`J `JQ4IIad fsJd sI s]]# -adaHKK`fsQdJJRsJade `QIO sQ `J]sQe IasI alreadywas in deepdistress, magnifying themisery. II. THE OVERSIGHT BOARD4S POWERS AND RESPONSIBILITIES Under PROMESA,Congress gave theOversight Boardtwo major tasks$fdKI`c7`Qbsc`Jfs] N]sQ sQe KdJIKHfIHK`Qb2HdKIO 0`fO4JedrI# Nearly
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