Pierluisi v. FOMB

United States Court of Appeals
For the First Circuit
No. 21-1071
IN RE: THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO
RICO, as Representative for the Commonwealth of Puerto Rico; THE
FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
Representative for the Puerto Rico Highways and Transportation
Authority; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO
RICO, as Representative for the Puerto Rico Electric Power
Authority (PREPA); THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD
FOR PUERTO RICO, as Representative for the Puerto Rico Sales Tax
Financing Corporation, a/k/a Cofina; THE FINANCIAL OVERSIGHT AND
MANAGEMENT BOARD FOR PUERTO RICO, as Representative for the
Employees Retirement System of the Government of the Commonwealth
of Puerto Rico; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR
PUERTO RICO, as Representative of the Puerto Rico Public Buildings
Authority,
Debtors.
________________________________________________________________
HON. PEDRO PIERLUISI, in his official capacity; PUERTO RICO
FISCAL AGENCY AND FINANCIAL ADVISORY AUTHORITY,
Plaintiffs, Counterdefendants-Appellants,
v.
THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO,
Defendant, Counterplaintiff-Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Laura Taylor Swain, U.S. District Judge*]
Before
Thompson and Lipez, Circuit Judges,
and Torresen,** District Judge.
William J. Sushon, with whom John J. Rapisardi, Peter
Friedman, O'Melveny & Myers LLP, Luis C. Marini-Biaggi, Carolina
Velaz Rivero, and Marini Pietrantoni Muñiz LLC were on brief, for
appellants.
Mark David Harris, with whom Timothy W. Mungovan, John E.
Roberts, Guy Brenner, Martin J. Bienenstock, Lucas Kowalczyk,
Shiloh A. Rainwater, and Proskauer Rose LLP were on brief, for
appellee.
Jorge Martínez-Luciano, with whom Emil Rodríguez-Escudero,
and M.L. & R.E. Law Firm were on brief, for the Speaker of the
Puerto Rico House of Representatives, the Hon. Rafael Hernández-
Montañez, amicus curiae.
June 22, 2022
________________________
* Of the Southern District of New York, sitting by designation.
** Of the District of Maine, sitting by designation.
LIPEZ, Circuit Judge. In the legislation addressing the
Commonwealth of Puerto Rico's fiscal crisis, Congress gave the
Financial Oversight and Management Board for Puerto Rico ("the
Oversight Board" or "the Board") authority to object to, and block
the implementation of, local laws that are inconsistent with
efforts to return the Commonwealth to fiscal solvency. Appellants,
the Governor of Puerto Rico and the Puerto Rico Fiscal Agency and
Financial Advisory Authority (known as "AAFAF" based on its Spanish
acronym), contend that the district court erred when it rejected
their contention that the Oversight Board acted arbitrarily and
capriciously in objecting to four laws duly enacted by Puerto
Rico's legislature. We disagree and therefore affirm.
I.
A. Legal Background
In 2016, Congress passed the Puerto Rico Oversight,
Management, and Economic Stability Act ("PROMESA") to address the
Commonwealth's fiscal crisis, facilitate restructuring of its
public debt, ensure its future access to capital markets, and
provide for its long-term economic stability.1 See 48 U.S.C.
1 We have elsewhere provided a more comprehensive background
on Puerto Rico's fiscal crisis and the enactment of PROMESA,
including PROMESA's creation of a process for the Commonwealth to
undergo bankruptcy proceedings. See, e.g., Aurelius Inv., LLC v.
Puerto Rico, 915 F.3d 838, 843-46 (1st Cir. 2019) (overruled on
other grounds by Fin. Oversight & Mgmt. Bd. for P.R. v. Aurelius
Inv., LLC (In re Fin. Oversight & Mgmt. Bd. for P.R.), 140 S. Ct.
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§ 2194(m)-(n). PROMESA established the Oversight Board, whose
members are appointed by the President, with wide-ranging
authority to oversee and direct many aspects of Puerto Rico's
financial recovery efforts. See, e.g., id. §§ 2141-2147. Among
its responsibilities is the certification of a fiscal plan and
annual budget for the Commonwealth. Id. §§ 2141-2142. Of
relevance to this appeal, PROMESA also provides the Oversight Board
with the authority to review and ask the district court to enjoin
the implementation of duly enacted Commonwealth legislation when
the Oversight Board determines that the legislation does not comply
with the approved fiscal plan or with PROMESA's statutory scheme
to return Puerto Rico to fiscal solvency.2
Section 108(a)(2) of PROMESA, titled "Autonomy of
Oversight Board," provides that "[n]either the Governor nor the
Legislature [of the Commonwealth] may . . . enact, implement, or
enforce any statute, resolution, policy, or rule that would impair
or defeat the purposes [of PROMESA], as determined by the Oversight
Board." 48 U.S.C. § 2128(a). To that end, PROMESA outlines a
multi-step, back-and-forth process by which the Oversight Board
1649 (2020)); Union De Trabajadores De La Industria Eléctrica Y
Riego v. FOMB (In re FOMB), 7 F.4th 31, 35 (1st Cir. 2021).
2 During the period relevant to this appeal, Puerto Rico was
operating under an approved "2019 Fiscal Plan" covering a five-
year period. The 2019 plan was subsequently replaced by a 2020
Fiscal Plan, covering the period through Fiscal Year 2025, which
was certified by the Oversight Board in May 2020.
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reviews Commonwealth legislation for consistency with the
statute's goals.
Section 204(a) provides that "not later than 7 business
days after [the Commonwealth] duly enacts any law during any fiscal
year in which the Oversight Board is in operation, the Governor
shall submit the law to the Oversight Board" along with (1) "[a]
formal estimate prepared by an appropriate entity of the
territorial government with expertise in budgets and financial
management of the impact, if any, that the law will have on
expenditures and revenues"; and (2) a "certification of compliance
or noncompliance" by that entity stating whether the law is
"significantly inconsistent with the Fiscal Plan for the fiscal
year". Id. § 2144(a)(1)-(2). The Oversight Board then notifies
the Governor and the Legislature if a submission is problematic,
either because it lacks a formal estimate or certification, or
because the certification states that the law is significantly
inconsistent with the fiscal plan. Id. § 2144(a)(3). The
Oversight Board may direct the Commonwealth to provide the missing
estimate or certification, or, if the Commonwealth has certified
that the law is inconsistent with the fiscal plan, may direct the
Commonwealth to "correct the law to eliminate the inconsistency"
or "provide an explanation for the inconsistency that the Oversight
Board finds reasonable and appropriate." Id. § 2144(a)(4)(B). If
the Commonwealth "fails to comply with a direction given by the
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Oversight Board," the Board "may take such actions as it considers
necessary, consistent with [PROMESA], to ensure that the enactment
or enforcement of the law will not adversely affect the territorial
government's compliance with the Fiscal Plan, including preventing
the enforcement or application of the law." Id. § 2144(a)(5).3
In addition to this general review process for duly
enacted legislation, PROMESA also gives the Oversight Board the
authority to review any request by the Governor to the Legislature
"for the reprogramming of any amounts provided in a certified
Budget." Id. § 2144(c)(1). The Governor must submit any such
request to reallocate budgeted funds to the Oversight Board. Id.
The Board then reviews whether such request "is significantly
inconsistent with the Budget." Id. The reprogramming cannot be
adopted "until the Oversight Board has provided the Legislature
with an analysis that certifies such reprogramming will not be
inconsistent with the Fiscal Plan and Budget." Id. § 2144(c)(2).
Last, but certainly not least, PROMESA authorizes the
Board to "seek judicial enforcement of its authority to carry out
its responsibilities." Id. § 2124(k).
3 The Legislature may request that the Oversight Board
"conduct a preliminary review of proposed legislation" before
enactment, but "any such preliminary review shall not be binding
on the Oversight Board in reviewing any law subsequently
submitted." 48 U.S.C. § 2144(a)(6).
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Although several of the provisions governing the Board's
ability to review Commonwealth laws have not previously come before
this court, the district court has authored several decisions that
lay the groundwork for this appeal.4 In its Law 29 I decision,
the court rejected the Commonwealth's argument that its
"certification of lack of inconsistency [between a law and the
fiscal plan] insulates a newly enacted law from scrutiny or
challenge by the Oversight Board." In re Fin. Oversight Mgmt. Bd.
for P.R., 403 F. Supp. 3d 1, 12 (D.P.R. 2019) ("Law 29 I"). To
the contrary, the court concluded, a certification by the
Commonwealth is not "preclusive of inquiries [by the Board] as to
its sufficiency or accuracy," and PROMESA "demands recognition of
the Oversight Board's ability to question and, if necessary, bring
before the [c]ourt challenges to the sufficiency and accuracy of
documents as important as revenue estimates and certifications
regarding significant inconsistencies with fiscal plans." Id. at
13-14. The court further explained that a "formal estimate" under
section 204(a) means a complete and accurate estimate "covering
revenue and expenditure effects of new legislation" over the entire
period of the fiscal plan. Id. at 13. Simply submitting a dollar
4Pursuant to 48 U.S.C. § 2168, the Chief Justice of the
United States has designated Judge Swain to preside over certain
cases involving PROMESA's implementation, and the relevant
district court decisions were authored by Judge Swain.
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estimate "on official agency letterhead, no matter how conclusory
or incomplete," does not suffice. Id. at 12.
In its subsequent Law 29 II decision, the court held
that Board determinations that Commonwealth laws impair or defeat
the purposes of PROMESA are reviewed under the "arbitrary and
capricious" standard typically used to review federal agency
decisions. In re Fin. Oversight & Mgmt. Bd. for P.R., 616 B.R.
238, 252-53 (D.P.R. 2020) ("Law 29 II"). While acknowledging that
PROMESA specifically provides that the Oversight Board "shall not
be considered to be . . . [an] agency . . . of the Federal
Government," 48 U.S.C. § 2121(c)(2), the court noted that the
Board's "powers and functions are similar to those of agencies
charged by Congress with carrying out the provisions of statutes,"
Law 29 II, 616 B.R. at 252. Under the "arbitrary and capricious"
standard of review, the court "must decide whether the Oversight
Board's determinations were supported by a rational basis and must
affirm [its] decisions if they are 'reasoned[] and supported by
substantial evidence in the record.'" Law 29 II, 616 B.R. at 253
(quoting Trafalgar Cap. Assocs., Inc. v. Cuomo, 159 F.3d 21, 26
(1st Cir. 1998)). Thus, the court held that the Oversight Board's
determinations will only be set aside if they are "arbitrary,
capricious, or manifestly contrary to the statute." Id. at 254
(quoting Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc.,
467 U.S. 837, 844 (1984)).
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In Law 29 II, the district court also noted that PROMESA
"allows the Oversight Board to prevent the application or
enforcement of a law when the Commonwealth government fails to
comply with a direction given by the Oversight Board pursuant to
section 204(a)[]." Id. at 248. And the Board "is not required to
prove to the [c]ourt that [a law] is significantly inconsistent
with the fiscal plan" to demonstrate the Commonwealth's failure to
comply with its obligations under section 204. Id.
The Commonwealth did not appeal either of the Law 29
decisions.
B. Factual Background
This appeal involves four Commonwealth laws that were
passed by the Legislature and challenged by the Board.5 Below, we
describe these laws and the communications between the
Commonwealth and the Board, pursuant to section 204(a), following
their enactment.6
5 A fifth law was before the district court but is not part
of the present appeal.
6 Pursuant to Executive Order 2019-057, the Puerto Rico
Department of Treasury ("Treasury"), AAFAF, and the Puerto Rico
Office of Management and Budget ("OMB") work together to prepare
fiscal impact estimates and certifications for any enacted laws.
For simplicity, we refer to the Governor, AAFAF, OMB, and Treasury
collectively as "the Commonwealth."
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1. Act 82 and Act 138
Because the communications regarding these two
healthcare-related laws were intertwined, we discuss them
together. Act 82, signed into law on July 30, 2019, creates a new
regulatory scheme and establishes an "Office of the Regulatory
Commissioner of Pharmacy Services and Benefit Managers" within the
Puerto Rico Department of Health to regulate Pharmacy Benefit
Managers ("PBMs") and Pharmacy Benefit Administrators ("PBAs"),
entities that negotiate medication costs between pharmaceutical
companies and third-party payers, including the Commonwealth. As
the district court explained, "Act 82 changes the arrangements
between [these entities] and pharmacies to require that pharmacies
be reimbursed for at least their cost of acquisition of
medications." The Commonwealth asserts that this change is
necessary to allow pharmacies to recover their actual drug
acquisition costs, ensuring that they continue to acquire
necessary medications for the people of Puerto Rico.
Act 138, signed into law on August 1, 2019, amends the
Insurance Code of Puerto Rico to (1) prohibit health care insurers
from denying provider enrollment applications submitted by
qualified health care professionals in Puerto Rico, and (2)
prohibit Managed Care Organizations from unilaterally terminating
or rescinding contracts with health care providers. The
Commonwealth asserts that the law was enacted "to discourage the
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mass exodus of health professionals [from Puerto Rico] and increase
the availability of health care services throughout the Island."
The Commonwealth did not submit any section 204(a)-
required materials on Act 82 within the statutory seven-day period.
On September 12, 2019, more than a month after Act 138 was signed
into law, the Commonwealth submitted to the Board a copy of the
Act with a certificate reading as follows:
Legislative Measure Number:
• Act No. 138-2019 ("Act 138"), herein attached.
Estimate of Impact of the Legislative Measure on Expenditures
and Revenues:
• Act 138 has no impact on expenditures or revenues.
Determination of the Legislative Measure's Compliance with the
Fiscal Plan:
• Act 138 is not significantly inconsistent with the New Fiscal
Plan for Puerto Rico.
On November 15, 2019, the Board notified the
Commonwealth by letter of several concerns it had regarding both
Act 82 and Act 138: (1) it still had not received any materials
regarding Act 82; (2) the copy of Act 138 and certificate had been
submitted after the seven-business-day period mandated by statute;
(3) the Commonwealth had failed to provide the required formal
estimate for Act 138; and (4) both Acts may be preempted by federal
law. The Board requested that the Commonwealth submit the missing
materials, including, specifically, "a formal estimate of the
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impact each Act will have on expenditures and revenues, including
the impact on the government's medical insurance plan ('Vital')"
and "an analysis of [the Acts] in relation to the corresponding
federal statutes to ascertain there are no conflicting provisions
that may jeopardize the grant of federal funds to the [Department
of Health]." The Board noted that it "reserve[s] the right to
take such actions as we consider necessary . . . including
preventing the enforcement or application of" the Acts if it
ultimately determines the Commonwealth has "failed to comply with
our directive . . . or that [the] law[s] impair[] or defeat[] the
purposes of PROMESA."
On November 18, 2019, more than three months after it
was due, the Commonwealth submitted the following certification
for Act 82:
Legislative Measure Number:
• Act No. 82-2019 ("Act 82"), herein attached.
Estimate of Impact of the Legislative Measure on Expenditures
and Revenues:
• Act 82 has an approximate impact of $475,131.47 in the
Department of Health's budget. However, Act 82 will be
implemented using budgeted resources. If reprogramming of
budgeted resources is needed, the appropriate agency will
submit to the [Board] a formal request.
• Act 82 has no impact on revenues.
Determination of the Legislative Measure's Compliance with the
Fiscal Plan:
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• Act 82 is not significantly inconsistent with the 2019 Fiscal
Plan for Puerto Rico.
A few days later, the Commonwealth responded to the
Board's November 15 letter. The Commonwealth began by emphasizing
its commitment to complying with section 204(a) of PROMESA, noting
the then-Governor's recent Executive Order mandating compliance
with that provision. However, the Commonwealth did not address
the substance of the Board's concerns in its November 15 letter
other than to vigorously contest the Board's ability to press the
Commonwealth as to whether Acts 82 and 138 are preempted by federal
law. In making its point that the consideration of possible
federal preemption was outside the scope of the certification
process, the Commonwealth insisted that
Section 204(a)(3) only allows the Board to send
notifications to the elected government under limited
circumstances, specifically, if no certifications are
sent or, if the Board understands an enacted law is
significantly inconsistent with the certified fiscal
plan.
In a December 18 response letter, the Board reiterated
its concern that the Commonwealth was not complying with the
section 204(a) requirements by failing to submit all required
materials and submitting some materials after the seven-business-
day deadline. The Board further asserted that the impact estimate
for Act 82 was not sufficiently "formal" and was "not accurate"
because "it provide[d] only an 'approximate impact' of the law on
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the Department of Health's budget" and was "dramatically at odds
with other authority on the subject; specifically, the Health
Insurance Administration's recent testimony at [a] public hearing
that [Act 82] would increase the Government's health plan budget
by $27 million." Regarding the preemption issue, the Board
insisted that requiring a preemption analysis was consistent with
section 204(a) because "if an enacted law negatively impacts the
Commonwealth's budget because of conflicts with federal statutes,
the law would not be consistent with the certified Fiscal Plan."
In a subsequent letter, the Commonwealth continued to
assert that it had complied with its obligations under section
204(a) because it had "not received any notification [from the
Board] that [the Acts] are significantly inconsistent with the
Fiscal Plan." The Commonwealth also maintained that the Board had
no authority to either determine that the Acts are preempted by
federal law or require the Commonwealth to consider whether they
are so preempted. Finally, the Commonwealth rejected the
suggestion that Act 82's estimate was "not accurate" because it
was "dramatically at odds" with the Health Insurance
Administration's testimony at the public hearing. Rather, it
asserted, "any statement by an agency during the legislative
process is subordinate to the determination of the appropriate
government entities" -- AAFAF, OMB, and Treasury -- "in charge of
issuing the [section 204(a)] certifications."
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In a letter dated April 27, 2020, the Board stated that
it had conducted its own analysis of the Acts because the
Commonwealth had "so far failed to confirm that its analysis took
into account germane factors pertaining to [the Acts] and their
impact on federal funding." Based on its own analysis, the Board
posed a series of detailed questions "regarding the financial
assumptions on which the laws appear to be based." For example,
for both Acts, the Board asked, "How will the potential impact
from increases in PMPM [Per Member Per Month] rates be mitigated
to maintain compliance with the Certified Commonwealth Fiscal
Plan?"7 The Board requested that the Commonwealth address its
specific questions as part of formal estimates to be submitted no
later than May 8, 2020. The Board further noted that
"implementation of [the Acts] prior to satisfaction of the
requirements of Section 204 would impair and defeat the purposes
of PROMESA" and warned that it could take further action, including
"seeking remedies for preventing" the Acts from being implemented.
The Commonwealth again responded that "no revised
certifications are necessary" because, among other contentions,
7Generally, the PMPM rate is the "predetermined amount" that
managed healthcare "plans are paid . . . per member per month [to]
manage and pay for all services included in the benefit package."
Bellin v. Zucker, 6 F.4th 463, 468 n.2 (2d Cir. 2021)(quoting
Antonia C. Novello, N.Y. State Dep't of Health, New York State
Management Long-Term Care, Interim Report to the Governor and
Legislature at 20 (May 2003)).
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section 204(a) requires only a "'good faith' effort to determine
the financial effects of a new law" and the certifications
"include[d] all of the required elements under section 204(a)(2)
and were provided in good faith." The Commonwealth also asserted,
despite its mention in the certification of possible
reprogramming, that because Act 82 would be "implemented using
budgeted resources," a formal request for reprogramming would not
be required.
2. Act 176
Act 176, signed into law on December 16, 2019, amends
the "Government of Puerto Rico Human Resources Administration and
Transformation Act" and the "Fiscal Plan Compliance Act" to undo
reductions in the accrual rates of vacation and sick days for
public employees.8 The Commonwealth asserts that the reductions
in leave had "negatively affected the public employees who are
entering the workforce because they have no time to spend with
their loved ones which, in turn, affects their family life."
On December 26, 2019, the Commonwealth submitted to the
Board a copy of Act 176 and the following certification:
Legislative Measure Number:
• Act No. 176-2019 ("Act 176"), herein attached.
8A prior law, Act 8-2017, reduced the accrual rates for
certain public employees.
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Estimate of Impact of the Legislative Measure on Expenditures
and Revenues:
• Act 176 amends Act 8-2017, known as the "Government of Puerto
Rico Human Resources Administration and Transformation Act,"
and Act 26-2017, known as the "Fiscal Plan Compliance Act,"
in order to allow government employees to accrue 2.5 vacation
days and 1.5 sick days per calendar month.
• The accrual caps for vacation and sick days remain at 60 and
90 days respectively. Additionally, Act 176 does not alter
the prohibition established in Act 26-2017, with regard to
the liquidation of vacation days accumulated in excess of the
60 days statutory limit.
• As prior to its enactment, government employees may only
liquidate vacation days when there is a cessation from
service. Act 176 does not allow public employees the
liquidation of sick days.
• In addition, every governmental entity and instrumentality is
required to formulate and manage a personnel vacation plan
for each calendar year, which shall be strictly complied with
by all employees, in order to ensure that said employees do
not accumulate excess vacation days, while ensuring that the
services provided by the corresponding governmental entities
and instrumentalities are not interrupted.
• Consequently, insofar as Act 176 merely adjusts the accretion
of vacation and sick days for public employees, but while
strictly adhering to the liquidation prohibitions established
in the 2019 New Fiscal Plan for Puerto Rico and Act 26-2017,
we conclude that Act 176 has no impact on expenditures.
• Act 176 has no impact on revenues.
Determination of the Legislative Measure's Compliance with the
Fiscal Plan:
• Act 176 is not significantly inconsistent with the 2019 Fiscal
Plan for Puerto Rico.
On May 11, 2020, the Board informed the Commonwealth
that it had failed to submit the required formal estimate in that
the certification "fails to account for Act 176's impact on
employee productivity, given that it permits employees to take
more vacation days during the year." The Board estimated that "if
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full-time employees utilize all of the additional days Act 176
makes available to them (12-21 days depending on employee group),
there could be a productivity loss of approximately five percent,
which in Fiscal Year 2021 is akin to losing the full-time
equivalent production of 2,400 public employees." The Board
therefore directed the Commonwealth to submit a "complete formal
estimate by May 19, 2020 taking lost productivity into account."
The Board stated that "implementation of Act 176[] prior to
satisfaction of the requirements of Section 204 would impair and
defeat the purposes of PROMESA" and expressly "reserve[d] the right
to take such actions as it considers necessary" including
preventing Act 176's implementation.
A week later, the Commonwealth responded, vigorously
defending the completeness of the submitted certification.
Specifically, the Commonwealth disputed the need to "account for
any speculative decrease in 'employee productivity'" because
section 204(a) requires only an estimate of the impact on
expenditures and revenues and the certificate "does exactly that."
The Commonwealth went on to assert that the existing caps on the
accrual and liquidation of vacation and sick days, and a
requirement that every governmental entity create personnel plans
to manage the use of vacation days, rendered the Board's employee
productivity concerns illusory.
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3. Act 47
Act 47, signed into law on April 26, 2020, amends the
"Puerto Rico Incentives Code" to expand the scope of healthcare
professionals who are eligible for incentive tax benefits. The
Commonwealth asserts that Act 47's purpose is to encourage more
medical professionals to enter practice and to stem the "flight"
of healthcare professionals from Puerto Rico.
On May 4, 2020, the Commonwealth submitted to the Board
the following certificate:
Legislative Measure Number:
• Act No. 47-2020 ("Act 47"), herein attached.
• Act 47 incorporates technical adjustments to Sections
1020.02(10), 2021.03(a) and 2023.02 of the Puerto Rico
Incentives Code in order to provide tax incentives to more
categories of health professionals. This legislation serves
the public interest by promoting the retention of
professionals in the health field[;] such a feat is
particularly relevant in light of the COVID-19 pandemic.
Estimate of Impact of the Legislative Measure on Expenditures
and Revenues:
• Act 47 has no impact on expenditures.
• Act 47 could have an estimated annual impact on revenues [of]
$25.7 million dollars. However, said amount will depend [on]:
(1) medical professionals that request tax incentives; (2)
medical professionals ultimately approved to receive such
incentives in light of the requisites; and (3) income
ultimately reported by the qualified professionals. In other
words, the impact provided by the Puerto Rico Department of
the Treasury consists in an educated estimate that must [be]
revised on an annual basis in order to provide an accurate
impact on the revenues.
Determination of the Legislative Measure's Compliance with the
Fiscal Plan:
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• Act 47 is not significantly inconsistent with the 2019 Fiscal
Plan for Puerto Rico.
On May 21, 2020, the Board responded that the certificate
lacked "even the barest specificity" regarding Act 47's fiscal
impact. The Board took specific issue with the suggestion that
Act 47's impact would be constant over the five-year term of the
2019 Fiscal Plan despite the Commonwealth's statement that the
impact estimate "must [be] revised on an annual basis" due to the
variables identified. The Board also challenged the
Commonwealth's determination that Act 47 was not significantly
inconsistent with the fiscal plan, opining that "it [is] difficult
to understand how the Act, which the Government itself estimates
will reduce revenue by tens of millions of dollars per year,
without any corresponding cut in spending or proposal to increase
revenues from other sources, can be anything other than
significantly inconsistent with the certified Fiscal Plan." For
these reasons, the Board requested that the Commonwealth submit a
"complete formal estimate . . . identifying," among other key
variables, "[m]inimum and maximum estimates of the percentage of
medical practitioners applying for th[e] incentive."
On May 28, the Commonwealth submitted what it termed a
"revised estimate," indicating that the Act could have a minimum
annual cost of $540,000 and a maximum annual cost of $40.1 million
(approximately $200 million over the period of the fiscal plan),
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based on 7,188 potentially eligible medical professionals. The
Commonwealth continued to maintain, however, that the Act was not
significantly inconsistent with the fiscal plan given the plan's
projected revenues of over $20 billion per fiscal year. That is,
the Commonwealth asserted that even $40 million a year is, in the
context of overall projected revenues, a relatively small amount
and could not be a "significant" deviation from the fiscal plan.
On June 5, the Board responded that the Commonwealth's submission
"inappropriately minimizes the economic impact" of the Act and
that "[v]iewing the costs of [the] Act [] in their proper context,
meaning relative to the Commonwealth's own-source revenues,
demonstrates that they are substantial." The Board concluded by
warning that "[c]ontinuing to implement Act 47 as it is written,
or proceeding to go forward with similarly significantly
inconsistent legislation notwithstanding objections from the
Oversight Board grounded in PROMESA, will lead the Oversight Board
to have no choice but to seek judicial relief."
C. Procedural Background
On June 12, 2020, the Commonwealth filed suit in federal
court seeking, in relevant part, a declaratory judgment that, for
each of the four laws in question, the Commonwealth had complied
with section 204(a)'s formal estimate and fiscal plan compliance
certification requirements. The Board subsequently filed
counterclaims requesting injunctive relief barring the
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implementation and enforcement of each law.9 The Commonwealth
moved for summary judgment on its claims related to Acts 138
(amending the health insurance code) and 176 (undoing reductions
in vacation and sick days).10 The Board filed cross-motions for
summary judgment as to Acts 138 and 176, motions for summary
9 Among its counterclaims, the Oversight Board sought
"nullification" of each law. The district court eventually
dismissed all claims for "nullification" because the Board "ha[d]
not demonstrated that such drastic relief [was] warranted under
the particular circumstances." 511 F. Supp. 3d at 128, 131, 133,
138. Neither side raises the "nullification" claims on appeal,
and we do not address them further.
The Commonwealth also sought declarations that the Oversight
Board cannot "unilaterally" invalidate a law and must seek judicial
relief under § 2124(k) to enjoin a law's implementation. In other
words, the Commonwealth sought declarations that the mere
invocation by the Board of noncompliance with PROMESA did not have
any legal effect in and of itself. The district court eventually
dismissed these counts given the court's disposition of the Board's
summary judgment motions. The Commonwealth does not address these
dismissals on appeal. However, we note the district court's
statement that "[a] proper declaration of a negative section
108(a)(2) determination by the Board [i.e., that a law would impair
or defeat the purposes of PROMESA] triggers a statutory prohibition
on action by the Government to go forward with the targeted
statute, . . . but it does not empower the Oversight Board
unilaterally to void the legislation or create an injunction." In
re Fin. Oversight & Mgmt. Bd. for P.R., 511 F. Supp. 3d 90, 134
(D.P.R. 2020).
10 After the Commonwealth's commencement of the legal
proceedings, the Oversight Board inquired as to whether the
Commonwealth had implemented any of the challenged Acts
"notwithstanding the Oversight Board's instructions to the
contrary pursuant to several provisions of PROMESA." The
Commonwealth responded that the Acts had either been fully
implemented, partially implemented, or it was the intention of the
Commonwealth to implement them, despite the ongoing dispute with
the Board.
- 22 -
judgment on the Commonwealth's claims as to Acts 82 (regulating
pharmacy reimbursement for medications) and 47 (increasing tax
incentives for medical professionals), and motions for summary
judgment on its counterclaims. In its opposition to the Board's
summary judgment motions regarding Acts 82 and 47, the Commonwealth
requested an order deferring a ruling and allowing additional
discovery pursuant to Federal Rule of Civil Procedure 56(d).
In its decision on the summary judgment motions, the
court (1) reiterated its holding in Law 29 II that it would apply
arbitrary and capricious review to the Board's determination under
section 108(a)(2) that a law's implementation would impair or
defeat the purposes of PROMESA; and (2) held that it would also
apply arbitrary and capricious review to the Board's
determinations under section 204(a) that the Commonwealth had
failed to comply with its obligations to submit "formal estimates"
and certifications. In so holding, the district court rejected
the Commonwealth's invitation to apply a distinct "substantial
evidence" standard under Puerto Rico law. The Commonwealth argued
that such a standard should apply because of the Supreme Court's
holding that the Board is an entity within the government of Puerto
Rico. See Fin. Oversight & Mgmt. Bd. for P.R. v. Aurelius Inv.,
LLC (In re Fin. Oversight & Mgmt. Bd. for P.R.), 140 S. Ct. 1649,
1659 (2020) ("Aurelius"). The district court, however, noted that
"[t]he Aurelius decision was focused narrowly on the applicability
- 23 -
of the Appointments Clause and does not undermine this [c]ourt's
prior reasoning about the level of deference properly afforded to
the Oversight Board determinations on account of the Oversight
Board's 'operational similarity' to a federal agency." In re Fin.
Oversight & Mgmt. Bd. for P.R., 511 F. Supp. 3d 90, 121 (D.P.R.
2020) (quoting Law 29 II, 616 B.R. at 252).
Applying the "arbitrary and capricious" standard of
review, the district court concluded that the Board's
determinations regarding the Commonwealth's noncompliance with
section 204(a), and its determinations that the challenged laws
would impair or defeat PROMESA's purposes, were not "arbitrary and
capricious." Regarding the Commonwealth's requests for discovery
concerning Acts 82 and 47, the court stated that the Commonwealth
had not "demonstrated that it lacks access to any evidence relating
to any material fact that is necessary to oppose" the Board's
motions. Id. at 127 n.22, 138 n.35. The court therefore enjoined
the implementation and enforcement of all four laws, with a
recognition that it could revisit such relief "if there emerge any
significant changes in legal or factual conditions." Id. at 128
n.23, 131 n.28, 133 n.30, 138 n.36. The Commonwealth timely
appealed.
II.
We review a district court's grant of summary judgment
de novo. López-Santos v. Metro. Sec. Servs., 967 F.3d 7, 11 (1st
- 24 -
Cir. 2020). Summary judgment is appropriate if the record,
construed in the light most favorable to the nonmovant, presents
no genuine issue of material fact and demonstrates that the movant
is entitled to judgment as a matter of law. Id.; Fed. R. Civ. P.
56(a). It is well-established that "[c]ross-motions for summary
judgment do not alter the summary judgment standard, but instead
simply 'require us to determine whether either of the parties
deserves judgment as a matter of law on the facts that are not
disputed.'" Wells Real Est. Inv. Tr. II, Inc. v. Chardon/Hato Rey
P'ship, S.E., 615 F.3d 45, 51 (1st Cir. 2010) (quoting Adria Int'l
Grp., Inc. v. Ferré Dev., Inc., 241 F.3d 103, 107 (1st Cir. 2001)).
Applying the "arbitrary and capricious" standard of
review, the district court evaluated whether the Board's
determinations were "reasoned[] and supported by substantial
evidence in the record." 511 F. Supp. 3d at 120. Although the
Commonwealth now agrees on appeal that the "arbitrary and
capricious" standard applies, it argues that this means more than
just considering whether the Board's determinations were reasoned
and supported by substantial record evidence.11 The Commonwealth
11 Even in rejecting application of the Puerto Rico
"substantial evidence" standard in favor of arbitrary and
capricious review, the district court questioned whether there is
"actually a difference between the two standards." 511 F. Supp.
3d at 121. As the district court explained, "[t]he Puerto Rico
'substantial evidence' standard requires [such] 'relevant evidence
as a reasonable mind might accept as adequate to support a
conclusion.'" Id. at 121-22 (quoting SPRINTCOM, Inc. v. P.R.
- 25 -
contends that "arbitrary and capricious" analysis must also
consider attendant principles developed through decades of
administrative law jurisprudence. Specifically, it contends that
the Board (1) "must [have] explain[ed] the standard on which it
bases its determination" (citing, inter alia, ACA Int'l v. FCC,
885 F.3d 687, 700 (D.C. Cir. 2018)) (2) "must have
contemporaneously and reasonably explained its decision" (citing,
inter alia, Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm
Mut. Auto. Ins. Co., 463 U.S. 29, 48-49 (1983)); and 3) may not
rely on "hindsight rationalizations" (citing, inter alia, DHS v.
Regents of the Univ. of Cal., 140 S. Ct. 1891, 1909 (2020)).
By contrast, the Board contends that even if we assess
whether its determinations were "arbitrary and capricious," we
should not apply "the entire apparatus of administrative law."12
Reguls. & Permits Admin., 553 F. Supp. 2d 87, 91-93 (D.P.R. 2008)).
The court opined that this standard of adequate evidence "is
appropriately considered as part of arbitrary and capricious
review." Id. at 122.
12On appeal, for the first time, the Board argues in the
alternative that we should apply a highly circumscribed "ultra
vires" standard of review to its decisions. But the Board waived
this argument by not raising it before the district court and by
repeatedly asserting before that court that "arbitrary and
capricious" review applied. See, e.g., 20-00080-LTS, Dkt. #16,
8-10 (Oct. 5, 2020); Bos. Redev. Auth. v. NPS, 838 F.3d 42, 47
(1st Cir. 2016) ("Having urged one standard of review in the
district court, [a party] cannot now repudiate its earlier position
and seek sanctuary in a different standard."). Moreover, raising
a new standard of review for the first time on appeal, after the
Commonwealth had already submitted its opening brief, does not
reflect well on the Board and is inconsistent with the respect it
- 26 -
That is, the Board argues that "principles from federal
administrative law that apply to agencies -- the rule that
administrative agencies must offer contemporaneous reasons for
their actions, the ban on hindsight rationalization, and the
requirement to articulate consistent standards for their
determinations" -- do not apply here because the Board is not a
federal agency.
We see logic on both sides. On the one hand, PROMESA
provides that the Oversight Board should be treated as an entity
within the territorial government, not a federal agency, 48 U.S.C.
§ 2121(c)(1)-(2); territorial governments are expressly excluded
from the definition of "agency" in the Administrative Procedure
Act ("APA"), 5 U.S.C. § 701(b)(1)(C); and the administrative law
principles cited by the Commonwealth have developed through
judicial review of "agency" action pursuant to the APA. Further,
the Board is in many ways a unique entity, which has been given,
by PROMESA's express language, a tremendous degree of authority
over aspects of Puerto Rico's financial recovery.
On the other hand, core administrative law principles
are not creatures of the APA. Rather, developed over time, these
principles promote fairness and transparency in the administrative
process and provide concrete guideposts for reviewing agency
should display in its interactions with the Commonwealth and the
district court.
- 27 -
action. See, e.g., SEC v. Chenery Corp., 332 U.S. 194, 196 (1947)
(describing as a principle predating the APA's passage the "simple
but fundamental rule of administrative law . . . that a reviewing
court . . . must judge the propriety of [agency] action solely by
the grounds invoked by the agency"). As the district court
recognized, there is clear "operational similarity" between the
Board and a federal agency. In basic terms, both have been charged
by Congress with using their statutory authority and
organizational expertise to implement the terms of a complex
statute. It stands to reason that the principles used to review
whether a federal agency decision is arbitrary or capricious could
also be useful in evaluating a decision by the Board.
All that said, to decide this appeal, we need not settle
to what extent the universe of federal administrative law should
be applied in reviewing Board determinations. We do think,
however, that some guidance is warranted on one important issue
-- the extent to which either the Board or the Commonwealth can
support its position with rationales and analysis proffered for
the first time during litigation.
The Commonwealth takes issue with the Board's submission
during the litigation of declarations that, the Commonwealth
claims, provided new justifications for the Board's determinations
regarding the challenged laws. The district court repeatedly cited
two such declarations: one by Board Executive Director Natalie A.
- 28 -
Jaresko regarding all four laws, and another by independent health
policy consultant Phillip Ellis stating his conclusion that Act 82
would increase healthcare costs for the Commonwealth. See, e.g.,
511 F. Supp. 3d at 129-30 & nn.25-26. The Commonwealth contends
that this reliance was improper.
"It is a 'foundational principle of administrative law'
that judicial review of agency actions is limited to 'the grounds
that the agency invoked when it took the action.'" Regents of the
Univ. of Cal., 140 S. Ct. at 1907 (quoting Michigan v. EPA, 576
U.S. 743, 758 (2015)). An agency may later "elaborate" on those
grounds, but it "may not provide new ones." Id. at 1908. In other
words, an agency must stand by the reasons it provided at the time
of its decision and cannot rely on post-hoc rationalizations
developed and presented during litigation. See Citizens to Pres.
Overton Park, Inc. v. Volpe, 401 U.S. 402, 419 (1971) ("The lower
courts based their review on the litigation affidavits that were
presented. These affidavits were merely 'post hoc'
rationalizations, which have traditionally been found to be an
inadequate basis for review." (internal citation omitted)); see
also State Farm, 463 U.S. at 50; Regents of the Univ. of Cal., 140
S. Ct. at 1908-09.
There may be good reasons for applying these principles
to the section 204(a) process. Requiring the Board to present to
the Commonwealth all of its rationales for disapproving of a piece
- 29 -
of legislation enables the Commonwealth to fairly respond to the
Board's stated concerns, or to address those concerns based on a
fuller understanding of the Board's reasoning. This enhanced
communication between the Commonwealth and the Board could
conceivably reduce the need for litigation. If and when a dispute
does go to court, a fully developed record enables the district
court to properly assess whether the Board's determinations were
supported by "substantial evidence" without considering post hoc
rationalizations. See Regents of the Univ. of Cal., 140 S. Ct. at
1908-09.
However, given the unique nature of the section 204(a)
process, and the relationship between the Commonwealth and the
Board under PROMESA, a hard-and-fast rule that the Board never may
proffer supplementary rationales or analysis during litigation
would not be appropriate. This case illustrates one reason why
this is so. By taking the Board to court soon after the two sides
had reached an impasse, the Commonwealth short-circuited the
process, particularly as to Acts 176 and 47, considering that the
Commonwealth filed suit just weeks after first hearing from the
Board regarding those laws. When one side cuts off the process in
this way by going to court, it is only fair that the other side
can further develop its position in the litigation.
Therefore, in proceedings arising from the section
204(a) review process, the district court should consider, on a
- 30 -
case-by-case basis, whether and to what extent it will allow either
side to support its position with supplementary materials first
proffered during litigation. In this case, with one exception
discussed below, it is not clear that the materials submitted by
the Board in the litigation contained anything more than
elaboration of rationales the Board had provided in the pre-
litigation correspondence. And this elaboration was certainly
appropriate given that, as we have noted, the Commonwealth was the
party that ended the correspondence by taking the Board to court.
We thus conclude that the district court did not err in considering
the supplementary materials submitted by the Board. We turn now
to our de novo review of the district court's judgment as to each
law.
III.
A. Act 82
Before the district court, the Board generally contended
that the Commonwealth had failed to comply with the estimate and
certification requirements of section 204(a) in regard to Act 82
and that the Act is "significantly inconsistent" with the fiscal
plan. The district court ultimately ruled for the Board solely on
the basis of the Commonwealth's failure to comply with section
204(a), holding that
the undisputed factual record, when viewed in the
light most favorable to the Governor, establishes
that the Government failed to comply with its
- 31 -
statutory responsibility to provide a formal
estimate and certification that was sufficiently
informative and complete, such that the Oversight
Board's determination of noncompliance and its
ultimate decision to seek injunctive relief under
section 204(a)(5) after repeated attempts to obtain
a formal estimate and certification are neither
arbitrary nor capricious. The only certificate of
compliance and estimate submitted by the
Government, which together comprise less than half
a page of text, plainly fall short of even facial
compliance with the formal estimate requirement;
they provide no context or analysis to support the
certification's assertion of consistency with the
fiscal plan imposed by PROMESA § 204(a).
In re Fin. Oversight & Mgmt. Bd. for P.R., 511 F. Supp. 3d at 126.
We agree.13
Despite the district court's prior explanation, in Law
29 I, that the formal estimate must cover the "revenue and
expenditure effects of new legislation" over the entire period of
the fiscal plan, 403 F. Supp. 3d at 13-14, the Commonwealth
submitted a conclusory and unsupported estimate that did not even
purport to account for the duration of the fiscal plan. As the
district court accurately observed, the Commonwealth provided
"absolutely no supporting rationale for the impact estimate of
$475,131.47" and no "clearly articulated compound estimate that
covers the entire duration of the 2019 Fiscal Plan." 511 F. Supp.
13In its analysis, the district court declined to consider
the significance of the fact that the Commonwealth had submitted
the certifications for Acts 82 and 138 well after the statutory
seven-day deadline. We also decline to address these timeliness
issues as they are unnecessary to our decision.
- 32 -
3d at 126. Nor did the Commonwealth take the "several
opportunities" provided by the Board "to cure the perceived
deficiencies and provide some sort of substantiation." Id. at
127. To the contrary, when the Board reasonably requested
information about "the financial assumptions on which the law[]
appear[s] to be based," pursuant to its authority under section
204(a)(4), the Commonwealth stonewalled. And then, having
stonewalled, the Commonwealth cut off the exchange and took the
Board to court. It was entirely reasonable for the Board to ask
the court to enjoin implementation of the law, consistent with
section 204(a), given that the Commonwealth had refused to comply
with its obligations under that section.
On appeal, the Commonwealth emphasizes the Board's
requests in the pre-litigation correspondence that it consider
whether Act 82 would jeopardize the receipt of federal funds.14
But the district court did not "reach whether the Board's request
for such analysis was arbitrary and capricious . . . because the
In its correspondence with the Board regarding Act 82, the
14
Commonwealth repeatedly took issue with the Board's requests that
it consider whether Act 82 would jeopardize the receipt of federal
funds. The Oversight Board consistently maintained in its
correspondence with the Commonwealth that it "was not asking for
a preemption analysis" but rather "an analysis of the [Acts] to
determine whether any provisions jeopardize the grant of federal
funds to the Puerto Rico Department of Health." Because we need
not consider the preemption issue, we do not determine whether
this distinction drawn by the Board is a distinction with a
difference for purposes of the statutory review process under
section 204(a).
- 33 -
Government's section 204(a) noncompliance is already patent" from
its refusal to respond to the Board's other questions about Act
82's fiscal impact. In re Fin. Oversight & Mgmt. Bd. for P.R.,
511 F. Supp. 3d at 126 n.20. We again agree that it is unnecessary
to consider whether the Commonwealth had to, as part of the "formal
estimate," account for Act 82's impact on the receipt of federal
funds. Even putting this request aside, the Board made reasonable
requests for the Commonwealth to support its estimate and the
Commonwealth plainly did not comply.
The Commonwealth attempts to rewrite the record by
suggesting that the Board's entire objection to the estimate and
certification was based on the federal funds issue and the Board's
reference to "the Health Insurance Administration's recent
testimony at [a] public hearing that [Act 82] would increase the
Government's health plan budget by $27 million." While we
acknowledge that the Board did repeatedly press the federal funds
issue, a fair reading of the record demonstrates that the Board
expressed a broader concern that the Commonwealth's conclusory
"approximate impact" estimate was insufficiently supported. It is
simply not evident from the record that the Board based its
objections solely on the federal funds issue, or on the purportedly
conflicting testimony.
Finally, the district court did not abuse its discretion
in denying the Commonwealth's request to defer summary judgment
- 34 -
pending further discovery. See In re PHC, Inc. S'holder Litig.,
762 F.3d 138, 142-43 (1st Cir. 2014) (explaining that we review
the district court's denial of a Rule 56(d) motion for abuse of
discretion). Other than a speculative suggestion that further
discovery would have somehow undermined the Board's bases for
questioning the Act's fiscal impact, the Commonwealth has not
pointed to any type of information that would be germane to its
claims and to which it did not already have access.
B. Act 138
As with Act 82, the district court ruled for the Board
on the basis of its contention that the Commonwealth had failed to
comply with its obligation under section 204(a). We again agree
with the district court's analysis. For Act 138, the Commonwealth
submitted a conclusory statement claiming "no impact on
expenditures and revenues." The Board reasonably requested that
the Commonwealth supply some analysis or data to back up that
assertion, but the Commonwealth refused to do so. Again, the
Board's determination that the conclusory and entirely
unsubstantiated "no impact" statement did not constitute the
required "formal estimate" was entirely reasonable. The Board was
justified in directing the Commonwealth to address how the Act
would impact expenditures and revenues. And it was justified in
determining that, by not submitting a formal estimate or addressing
- 35 -
the Board's specific questions, the Commonwealth had failed to
comply with its obligations under section 204(a).15
Finally, for the same reasons we expressed in relation
to Act 82, we reject the Commonwealth's contention that the
district court abused its discretion by proceeding to rule on the
summary judgment motions without further discovery.16
C. Act 176
The district court concluded that the Board had
reasonably determined, pursuant to its authority under section
108(a)(2), that implementing Act 176 would "impair or defeat"
PROMESA's purposes.17 In re Fin. Oversight & Mgmt. Bd. for P.R.,
511 F. Supp. 3d at 133. In so concluding, the district court
15Regarding Act 138 and Act 47, which is discussed further
below, we are cognizant of Puerto Rico's important efforts to
attract and retain doctors and other medical professionals. We
encourage the Commonwealth to focus on providing robust
documentation regarding these efforts as it continues to develop
incentives for medical professionals to practice on the island.
16We again need not address the "federal funds" issue because,
setting that topic of inquiry aside, the Board's requests for more
analysis by the Commonwealth were reasonable, and the
Commonwealth's responses were patently noncompliant.
17Before the district court, the Board argued both that (1)
the Commonwealth had failed to meet its obligations under section
204(a) to submit proper estimates and certifications for the four
laws; and (2) the four laws in their substantive effect would
"impair or defeat the purposes of" PROMESA. The district court
based its ruling on the first ground with respect to Acts 82 and
138 and, as explained below, on the second ground with respect to
Acts 176 and 47. On appeal, the Board does not raise the first
ground as an alternative basis for affirming the district court as
to Acts 176 and 47.
- 36 -
endorsed the Board's stated concern that the law would negatively
affect expenditures through decreased worker productivity: "Common
sense and basic principles of economics dictate that, by allowing
sick days and vacation days to accrue more quickly, without
reducing pay levels, Act 176 affects expenditures by increasing
the price the Government pays for labor -- causing the Government
to pay the same amount of money to each person for fewer days
worked." Id. at 132. The district court further noted that the
Commonwealth's recourse to the provision requiring each agency to
institute plans governing their employees' taking of vacation days
did not adequately address the Board's concern.
We agree with both points. The Board reasonably
determined that Act 176 would decrease worker productivity --
resulting in the Commonwealth essentially paying higher labor
costs to provide services -- and the Commonwealth did not refute
this determination. It was thus reasonable for the Board to
determine that the Act would impair implementation of the fiscal
plan and PROMESA's purpose of securing the Commonwealth's fiscal
solvency.18
18 The Commonwealth urges us to determine the precise meaning
of "significantly," as in when a law is "significantly inconsistent
with the Fiscal Plan for the fiscal year". Id. § 2144(a)(1)-(2)
(emphasis added). It contends that a law can only "impair or
defeat the purposes of" PROMESA if it is "significantly
inconsistent" with the fiscal plan, and that the purported
inconsistency between the fiscal plan and Act 176 cannot be deemed
"significant." We need not determine the precise meaning of
- 37 -
The district court also based its decision on the Board's
contention that Act 176 conflicts with the fiscal plan's goal of
"right-siz[ing] the workforce to the population size" and ensuring
that agencies "deliver services in as efficient a manner as
possible." Id. at 132. The Commonwealth contends that these
rationales were never articulated by the Board during the pre-
litigation correspondence. We agree that these rationales were
first articulated during the litigation and were more than mere
elaborations on the Board's stated concern about worker
productivity. In the future in such a situation, the district
court, mindful of traditional administrative law principles,
should consider whether it is appropriate to accept a new rationale
in support of the Board's position. Here, however, we are not
troubled by the district court's consideration of the new
rationales. As we have explained, although it would have been a
better practice for the Board to have clearly articulated these
rationales in its correspondence with the Commonwealth, it was not
inappropriate for the Board to supplement its reasons for
challenging the laws during the litigation, given the
Commonwealth's abrupt termination of the section 204(a) process by
taking the Board to court.
"significantly." Whatever its precise meaning, Act 176, with its
sizable projected impacts on expenditures, can reasonably be
deemed "significantly inconsistent" with the fiscal plan.
- 38 -
D. Act 47
Lastly, the district court ruled in the Board's favor
regarding Act 47, "[b]ased on [the Board's] determination that the
loss of tens of millions of dollars" from the expansion of tax
incentives "would defeat or impair PROMESA's purposes, which was
communicated to the Government in the course of correspondence
concerning section 204(a)." Id. at 136. The district court
explained that "[t]he fact that Act 47 has the undisputed potential
to reduce revenues by about $200 million over five years by
creating tax incentives with no offsets to make it revenue neutral
renders its implementation a flagrant and significant deviation
from" the fiscal plan's principle of "revenue neutrality." Id. at
137. We again agree with the district court. Simply put, it was
reasonable for the Board to determine that a law that could reduce
revenues by up to $200 million with no corresponding offsets would
"impair or defeat the purposes of" PROMESA.
The Commonwealth makes much of the fact that, in its
pre-litigation correspondence, the Board did not specifically cite
section 14.3.3, the provision regarding "revenue neutrality" in
the 2019 fiscal plan.19 But the Board expressly stated in its
The principle of revenue neutrality for tax measures, which
19
is also in the 2020 Fiscal Plan, see 2020 Fiscal Plan at 218,
provides that "any tax reform or tax law initiatives that the
Government undertakes must be revenue neutral, that is, all tax
reductions must be accompanied by offsetting revenue measures of
- 39 -
letter regarding Act 47 that "it [is] difficult to understand how
the Act, which the Government itself estimates will reduce revenue
by tens of millions of dollars per year, without any corresponding
cut in spending or proposal to increase revenues from other
sources, can be anything other than significantly inconsistent
with the certified Fiscal Plan." Given this description of revenue
neutrality in all but name and the reference to the fiscal plan,
we cannot conclude that the Commonwealth was unaware of the Board's
revenue neutrality-based objection before the litigation. In
other words, the revenue-neutrality issue was not truly raised for
the first time during litigation and we are not troubled by the
district court's consideration of this rationale.20 We conclude,
then, for the same reasons articulated by the district court, that
the Board reasonably determined that Act 47 would "impair or defeat
the purposes of" PROMESA.21
a sufficient amount identified in the enabling legislation," 2019
Fiscal Plan at 124.
20 Because we think it plain that a law that reduces revenues
by up to $200 million with no offsetting measures is "significantly
inconsistent" with the fiscal plan and would "impair or defeat the
purposes of" PROMESA, we need not, and do not, opine as to whether
the Board could seek to enjoin any law that technically violates
revenue neutrality, no matter how minimal the revenue reduction.
21 The Commonwealth argues, in one paragraph of its brief,
that the Oversight Board had a responsibility to "explain its
change of position" because "[b]efore Act 47's passage, the Board's
Municipal Affairs and Legislative Review Director had assured the
Governor's Legislative Affairs Adviser that the Board had 'no
issue' with Act 47." Even assuming this argument was preserved
and is sufficiently developed before us, the Commonwealth has not
- 40 -
***
In summary, then, in the case of all four laws, we
conclude that the Board did not act arbitrarily and capriciously
in exercising its authority under PROMESA. To the contrary, the
Board reasonably determined that the Commonwealth had either not
met its obligations under section 204(a) to provide a "formal
estimate" and certification (Acts 82 and 138), or that the laws
would "impair or defeat the purposes of" PROMESA (Acts 176 and
47). The procedures and obligations contemplated by section 204(a)
are not procedure for procedure's sake. Rather, they serve the
critical purpose of allowing the Board to determine that the
legislation at issue adheres to the fiscal plan and will not impair
PROMESA's purpose of restoring Puerto Rico to fiscal stability.
We therefore affirm the district court's judgment with respect to
all four laws.22
demonstrated that this preliminary "assurance" from one official
to another was sufficiently formal such that the Board's later
position was indeed an "abrupt about face" meriting explanation.
Cf. FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009)
(noting that an agency usually must provide some recognition of,
and explanation for, a change in agency policy).
22 The Commonwealth also argues that the Oversight Board
violated a norm of administrative law by not "treating like cases
alike" when it objected to Acts 82, 138, and 176. Even if we were
to accept the application of this "norm" to the Board's actions,
it is not clear to us that this argument was raised before the
district court, and we would therefore deem it waived. To the
extent the argument was preserved, it is fatally underdeveloped.
See United States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990)
("[I]ssues adverted to in a perfunctory manner, unaccompanied by
some effort at developed argumentation, are deemed waived."). The
- 41 -
IV.
Congress had to make difficult choices in writing
PROMESA and responding to Puerto Rico's fiscal crisis. One of
those choices was giving the Board the authority to review and
block the implementation of laws enacted by the Puerto Rico
legislature if they "impair or defeat the purposes of" PROMESA.
We recognize the Commonwealth's objections to this unique
structure. But that is the governing structure that applies here.
The Board did not act "arbitrarily and capriciously" in exercising
its authority under PROMESA.23
Affirmed. Each side to bear its own costs.
Commonwealth merely cites to several other certifications that
were accepted by the Board and asserts that these "other laws had
a demonstrated, non-speculative fiscal effect or their
certificates included similar levels of analysis." Asking us to
perform this context-less comparison is simply asking us to do too
much in building the Commonwealth's argument. See id. (noting
that counsel cannot "leav[e] the court to do counsel's work, create
the ossature for the argument, and put flesh on its bones").
23 We are disheartened by the antipathy between the parties
that was evident in the briefing and at oral argument. In the
future, we hope that the Commonwealth and the Board will recommit
to working together in a non-adversarial fashion so that this type
of litigation can be avoided, in the best interests of the people
of Puerto Rico.
- 42 -