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Puerto Rico Chaos May Empower Board in Bankruptcy Hearings as Rossello Exit Looms

Protesters Demand Resignation Of Puerto Rico's Governor Ricardo RosselloProtesters Demand Resignation Of Puerto Rico's Governor Ricardo Rossello
Widespread protests calling for Puerto Rico's governor, Ricardo Rossello, to step down have worked. But his resignation could bring other issues.Joe Raedle–Getty Images

Governor Ricardo Rossello’s looming resignation leaves Puerto Rico’s government in shambles and may strengthen the hand of federal overseers tasked with imposing austerity on the bankrupt island to pull it from a years-long financial crisis.

Since the disclosure almost two weeks ago of scandalous text messages among Rossello’s inner circle, the administration had already lost its investment officer, press secretary and two fiscal agency heads -- one of whom lasted just five days. The governor’s chief of staff quit Tuesday night. The treasurer left last month amid a federal corruption investigation. And it looks increasingly likely that the mass exodus would be capped Wednesday, with local newspapers reporting that Rossello was planning to resign within hours.

The turmoil came just as a federal court judge Wednesday held a hearing in the bankruptcy case that was overshadowed by the administration’s dysfunction, which could create an opening for a federal oversight board to consolidate power and impose deeper budget-cutting measures as part of the more than two-year-old bankruptcy. The political crisis and corruption probes surrounding the administration may undermine opposition to such cuts by strengthening the view that the government is inefficiently run and rife with overspending, potentially freeing up more money for creditors.

“Judges are human,” said retired federal judge Richard Schmidt, who has followed the case closely. “They are supposed to rule based only on the law. But as a judge, it is hard to not know what’s going on.”

What’s going on is the island’s biggest political conflagration in a generation, one that follows the debt crisis, an economic recession that has lasted more than a decade and Hurricane Maria in 2017, a storm that killed thousands.

Puerto Ricans took to the streets to call on Rossello to step down after the disclosure of the texts, which insulted rivals and average citizens, and the indictment of two former administration officials on corruption charges.

With his departure, the Financial Oversight and Management Board may gain power. The U.S. Congress created the panel to supervise the commonwealth’s budgets and represent it in bankruptcy court as a condition of allowing debt relief.

The board has advocated painful measures to mend the island that’s home to 3.2 million U.S. citizens: cuts to primary and secondary education, reduced pension benefits and higher tuition for University of Puerto Rico students. One of Rossello’s leaked texts was a series of middle-finger emojis directed at the board.

At the bankruptcy hearing Wednesday in federal court in San Juan, Martin Bienenstock, an attorney for the federal board, said it will miss its self-imposed deadline for filing a restructuring plan for debt tied to the central government. He said that "recent events" on the island haven’t changed the board’s legal positions in the case.

But the turmoil could enhance friction between the overseers and local elected officials. The board and Puerto Rico’s officials must cooperate to pass bills to implement debt-cutting plans to be submitted to the bankruptcy court. But the change of control, spate of departures and public outcry against the governor has complicated an already contentious process.

Swain’s Way

U.S. District Judge Laura Taylor Swain, who oversees the bankruptcy, has been unwilling to grant the board unilateral power to change laws or reform regulatory procedures, instead insisting on cooperation. She may signal a change of heart during a hearing Wednesday in San Juan. Later, lawyers will face off in Boston in front of a three-judge panel in a case that will decide whether Rossello can evade spending controls imposed by the board.

Attorneys for Puerto Rico must argue that the administration is a responsible steward of public funds two weeks after Julia Keleher, the former secretary of education, and Angela Avila-Marrero, former head of the health insurance administration, were accused of inflating contracts and steering them to favored firms. Last month, Rossello asked Treasury Secretary Raul Maldonado to resign after he disclosed a federal investigation into the department.

“The timing could not be worse,” said bankruptcy lawyer John Mudd, who has represented local creditors in the case and written commentaries about it. “Judges look at newspapers.”

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