Last week, the district court nullified several laws passed by Puerto Rico’s legislature that were not authorized by the Financial Oversight and Management Board appointed to rectify the island’s municipal finances under the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA (48 U.S.C. §§ 2161 et. seq.).

Of perhaps greatest legal significance, District Judge Laura Taylor Swain employed the so-called Chevron deference in deciding whether the Oversight Board properly overturned expenditures by the commonwealth’s government.

In her April 15 decision, Judge Swain focused on pensions for municipal employees.

In May 2017, the Oversight Board initiated Puerto Rico’s debt restructuring under PROMESA, a law that incorporates large swaths of chapter 9 municipal bankruptcy. In August 2017, Puerto Rico’s legislature enacted a law calling for the commonwealth to pay all municipal pensions on a pay-as-you-go basis. In turn, municipalities were required to reimburse the commonwealth government for the benefits paid to the municipalities’ employees.

In May 2019, the Oversight Board approved Puerto Rico’s most recent fiscal plan that contemplated continued pay-as-you-go reimbursement by municipalities. Four days later, however, the legislature enacted a law that rescinded municipalities’ reimbursement obligations.

Judge Swain said that rescinding reimbursement obligations would cost the commonwealth’s government $311 million in fiscal 2020 and $1.7 billion over five years.

In the first half of 2018, Puerto Rico enacted several resolutions authorizing millions of dollars in expenditures that were not included in budgets approved by the Oversight Board. So, the Oversight Board filed a complaint in July 2019 asking Judge Swain to invalidate the resolutions and the suspension of municipalities’ reimbursement obligations.

Judge Swain granted the Oversight Board’s summary judgment motion in large part in her April 15 opinion by holding that the resolutions and the termination of reimbursement obligations were not enforceable and of no effect. In the Headlines on April 15, ABI reported Judge Swain’s opinion. To read the story, click here.

For the most part, Judge Swain’s opinion was devoted to identifying and interpreting the provisions in PROMESA that enable the Oversight Board to invalidate the legislature’s expenditures.

If there is to be an appellate challenge, the issue of widest interest stems from Judge Swain’s decision to apply Chevron deference to the Board’s decisions invalidating the legislature’s expenditures.

Although PROMESA explicitly says that the Oversight Board is not a government agency, Judge Swain said that the Board’s functions and powers are similar to those of agencies. The “operational similarities,” she said, “render[] precedent governing judicial review of federal agency actions instructive in considering whether the Oversight Board has acted in a manner consistent with the provisions of PROMESA.”

Under Chevron U.S.A. Inc. v. Natural Res. Def. Council Inc., 467 U.S. 837 (1984), the Supreme Court said that an agency and the reviewing court are equally able to apply rules of statutory construction when the intent of Congress is clear from the statute. If statutory intent is ambiguous, Chevron tells the court that the agency’s interpretation of the statute has controlling weight unless the agency’s actions are shown to be arbitrary, capricious or manifestly contrary to the statute.

Consequently, a court must uphold an agency’s decision if it is reasoned and supported by substantial evidence in the record.

Turning to PROMESA, Judge Swain said that Congress “has not unambiguously expressed its intent” about the characteristics of governmental action “that would impair or defeat the purposes” of the statute. She found no legislative history giving meaning to the statutory terms “impair” and “defeat.”

Judge Swain said that the “position of responsibility” bestowed by Congress on the Oversight Board “warrants the Court’s deference to its determinations . . . .”

Applying the rule of deference to the record, Judge Swain said that the Oversight Board “has articulated an entirely rational basis for its determinations” that the actions of the legislature were “significantly inconsistent with” the fiscal plans approved by the Board. She therefore held that the resolutions and the cessation of municipal reimbursement for pension costs “are not enforceable and are of no effect.”