In Puerto Rico, Law Passed for Fiscal Crisis Hampers Storm Recovery

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As Puerto Rico faced a fiscal crisis last year after racking up $123 billion in debt and pension liabilities, Congress passed special legislation to give it relief from creditors and time to find its financial footing.

Now, with Washington’s help needed perhaps more urgently, a key piece of that legislation is hampering efforts to address the lingering effects of Hurricane Maria — and possibly threatening Puerto Rico’s broader economic comeback as well.

Two contentious events this week — a court ruling and a day of hearings on Capitol Hill — have brought the fundamental challenge into sharp focus: Even in an emergency, federal officials have limited say over how Puerto Rico conducts its affairs.

“It would be more efficient if we could just say, ‘These people aren’t doing their job,’ and replace them,” said James E. Spiotto, a managing director at Chapman Strategic Advisors, a municipal finance consulting firm, referring to recovery efforts on the island that remain halting nearly two months after the storm hit. “But we are a democracy, not an oligarchy.”

The special legislation, known as Promesa, placed Puerto Rico under the oversight of a federal board and subjected its debt to a court-supervised restructuring. The law patched together provisions reflecting the island’s status as a self-governing United States territory and parts of Chapter 9, the federal bankruptcy code covering local governments.

Among other things, Chapter 9 greatly limits the authority that bankruptcy court judges and other federal officials can exert over insolvent local governments. Despite that aspect of Chapter 9, which prevents the imposition of tax increases or pension freezes in bankruptcies involving cities like Detroit and Stockton, Calif., Congress chose to incorporate it into Promesa.

The implications of that move are becoming clearer as relief efforts in Puerto Rico sputter along compared with the smoother federal responses this year to hurricanes in Florida and Texas.

Last month, it emerged that the island’s public utility, the Puerto Rico Electric Power Authority, or Prepa, had given a small Montana company a $300 million contract under questionable circumstances to get the island’s electric grid up and running. The awarding of that contract is now under investigation.

Amid the resulting outcry, the oversight board asked the judge overseeing the restructuring case to appoint a new leader for the authority, which itself is insolvent. The board framed its proposal in dry legal terms, steering clear of any hint that Prepa’s existing leadership might be incompetent.

Others were less diplomatic. A group of Prepa bondholders filed its own motion with the court, saying that although the power was still out across large parts of Puerto Rico, it was not because Prepa’s infrastructure had been destroyed.

The bondholders had hired their own engineering team, which said it found that while plenty of wires were down, the island’s power plants were unscathed. Beyond that, the team’s leader, Derek HasBrouck said, almost all of the authority’s transmission towers were intact, as were utility poles in San Juan and many substations. He blamed “the egregious mishandling of the restoration process on Prepa’s part” for the continuing blackouts.

“The oversight board is right to conclude that fundamental changes, including senior leadership changes, are required at Prepa,” Mr. HasBrouck wrote in a filing. The bondholders called for the appointment of a receiver, rather than the “chief transformation officer” sought by the oversight board.

But on Monday, after hearing arguments, Judge Laura Taylor Swain ruled that under Promesa, the oversight board had no legal authority to install new leadership at the power company. Only Puerto Rico’s government, she said, has that power.

Judge Swain also said the board had no authority to impose austerity measures on Puerto Rico, even if it thought steps taken by Gov. Ricardo Rosselló did not go far enough. The board had tried to impose such measures earlier this year, but set that aside after the damage caused by Hurricanes Irma and Maria forced the island’s government to redo its entire fiscal plan.

Mr. Spiotto said he thought Judge Swain had interpreted the oversight board’s authority correctly. But Congress can still tie some strings to whatever portion of the requested aid it authorizes, he added.

On Tuesday, appearing before the Senate Committee on Energy and Natural Resources, Natalie Jaresko, the oversight board’s executive director, called Judge Swain’s decision “a setback for us” that she said would make the restoration of electrical power much more difficult. And getting the electrical grid back in shape, she said, is “the single most important block of the recovery, short and long term.”

Until that happens, she said, Puerto Rico will not have a functioning water system, public schools cannot open and businesses shut since the Hurricane Maria will stay that way. Puerto Ricans, she added, would continue to head to the mainland for a semblance of normal life.

“We are not yet throwing up our hands,” Ms. Jaresko said.

By contrast, Mr. Rosselló, who also testified before congressional committees on Tuesday, appeared emboldened by Judge Swain’s ruling. Just last week, many Puerto Rico residents were blaming the governor for failing to get the lights back on and for awarding the contract to the Montana company, Whitefish Energy Holdings.

But after the ruling on Monday, he defiantly told lawmakers that the oversight board had authority in just three areas: representing Puerto Rico in the restructuring proceedings, ensuring that its budget is balanced and helping the island regain its ability to tap the public credit markets.

Mr. Rosselló is seeking up to $95 billion to repair the hurricane damage, and he forcefully countered those who suggested that the oversight board ought to be tracking the money and making sure it was spent appropriately.

Representative Jody B. Hice, Republican of Georgia, insisted that the board had “to have administrative control over the money.”

“Why?” Mr. Rosselló asked, adding that it was “not their role.”

Representative Rob Bishop, Republican of Utah and the chairman of the House Natural Resources Committee, urged Mr. Rosselló to stop clashing with the oversight board.

“You’re asking for a huge amount of money,” Mr. Bishop said. “There’s got to be an increase in cooperation.”

“It can’t be at the expense of democratic rights, sir,” Mr. Rosselló said.