The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) is the federal legislation that was enacted to provide a special bankruptcy framework for Puerto Rico. 48 U.S.C. §§2101 et seq. Since May 2017 Puerto Rico has been undergoing the largest municipal bankruptcy in the history of the United States (Heather Long, Puerto Rico Files for Biggest US Municipal Bankruptcy CNN Business (May 3, 2017)). An important component of PROMESA is the establishment of a Financial Oversight and Management Board (FOMB) with oversight powers over the financial affairs of the Puerto Rican government and sole authority over the Puerto Rico bankruptcy cases. 28 U.S.C. §§2121(b), 2121(d), and 2124(j)(1).

Prior to the commencement of its bankruptcy case Puerto Rico's economy was in a 10-year recession (John W. Schoen, Here's How an Obscure Tax Change Sank Puerto Rico's Economy CNBC (Sept. 26, 2017)). In addition, during the last eight years it is estimated that Puerto Rico's population has declined by 14.3 percent. By the time Puerto Rico filed for bankruptcy it had the highest sales tax rate in the United States, 11.5 percent (Puerto Rico Governor Signs Law Raising Sales Tax to 11.5 Pct, Associated Press (May 29, 2015)). Significantly, 44.4 percent of the people in Puerto Rico live below the poverty level (Alemayehu Bishaw and Craig Benson, Poverty: 2016 and 2017, American Community Survey Briefs (September 2018)). 58 percent of children in Puerto Rico live below the poverty level (Bianca Faccio, Left behind: Poverty's toll on the children of Puerto Rico, Child Trends, Blog (March 28, 2016)). Puerto Rico's unemployment rate is 7.7 percent, which is twice the unemployment of the United States.

FOMB

In September 2017 Puerto Rico was devastated by Hurricane Maria. 2,975 deaths have been attributed to Hurricane Maria (Sherri Fink, Nearly a Year After Hurricane Maria, Puerto Rico Revises Death Toll to 2,975, New York Times (Aug. 28, 2018)). Not only did Hurricane Maria cause $90 billion in damage, but also it was third costliest hurricane in the history of the United States (Fast Facts Hurricane Costs, Office for Coastal Management). The Center for Puerto Rican Studies estimates that between 2017 and 2019 that 470,335 residents will migrate from Puerto Rico. (Edwin Meléndez and Jennifer Hinojosa, Estimates of Post-Hurricane Maria Exodus from Puerto Rico, Center for Puerto Rican Studies (October 2017)).

The FOMB has failed in its mission. It has failed to take a holistic approach to addressing the two crises that face Puerto Rico: Puerto Rico's debt and the devastation of Hurricane Maria. It has concentrated on debt repayment. The board has failed to work in concert with the elected government of the Commonwealth of Puerto Rico to rebuild Puerto Rico after Hurricane Maria. It is authorized to recommend to the President and Congress changes in federal law, including PROMESA, or other actions that would assist in the restructuring of Puerto Rico (48 U.S.C. §2148(a)(3)), and is empowered to advocate for long-term aid to address the destruction done by Hurricane Maria.

The FOMB is charged with approving a fiscal plan that is intended to be the plan for fiscal recovery and solvency for Puerto Rico. 48 U.S.C. §2141. The fiscal plan and the FOMB's vision for Puerto Rico is fatally flawed because the FOMB's financial consultant has a conflict of interest that taints the independence of the fiscal plan and the FOMB; the fiscal plan fails to address certain structural flaws in the Puerto Rican economy; the fiscal plan fails to address the remediation necessary to rectify the damage done by Hurricane Maria; and the FOMB has failed to persuade Puerto Ricans that the fiscal plan will succeed.

The FOMB has retained McKinsey & Co. as its financial consultant. McKinsey, through its affiliates, holds at least $20 million in claims against Puerto Rico (Mary Williams Walsh, McKinsey Advises Puerto Rico on Debt. It May Profit on the Outcome, The New York Times (Sept. 26, 2018)). McKinsey has a conflict of interest. Id. Under Bankruptcy Code Section 327(a) McKinsey would not have been retained as an estate professional because it is not disinterested. U.S. Trustee v. Price Waterhouse, 19 F.3d 138 (3d Cir. 1994).

McKinsey is a central figure in the formulation the fiscal plan. Having an entity that through its affiliates holds $20 million in claims devise the fiscal plan and be the principal financial advisor taints the entire Puerto Rico bankruptcy case. McKinsey's role as the principal financial advisor raises the appearance of impropriety. McKinsey is in a position to benefit by advocating a repayment that is munificent to creditors and that simultaneously stresses government austerity. The FOMB owes a fiduciary duty not only to the creditors, but also to the people of Puerto Rico. See In re Vebeliunas, 231 B.R. 181, 194 (Bankr. S.D.N.Y. 1999). The FOMB's failure to discharge McKinsey is a poor reflection on the board because it reflects a lack of good faith in proposing the fiscal plan and the prosecution of the Puerto Rico bankruptcy case.

Various prominent economists, including Prof. Joseph Stiglitz, have voiced concerns that the fiscal plan will fail (Martin Guzman, Joseph E. Stiglitz, Disaster Capitalism Comes to Puerto Rico, Project Syndicate (Nov. 18, 2018)). A central component of a Puerto Rico fiscal plan must include a viable long term economic development plan to resuscitate Puerto Rico's moribund economy. The enactment of tax incentives to attract industry to Puerto Rico is vital.

If Puerto Rico's economy is not revived, then it is doubtful that Puerto Rico will be able to simultaneously provide essential government services and pay debt service. Given that the FOMB is a federally appointed board, it is in the best position to advocate for a long term Puerto Rico economic development plan. This is especially case because Puerto Rico lacks representation in Congress.

An important component of any economic development plan is the repeal of the Jones Act. The Jones Act requires that all goods shipped to Puerto Rico be transported on ships bearing the American flag (Matthew Yglesias, The Jones Act, the obscure 1920 shipping regulation strangling Puerto Rico, explained, Vox (Oct. 9, 2017)). A study conducted in 2010 estimated that the Jones Act costs Puerto Rico $537 million a year (Chris Isidore, The Jones Act has been hurting Puerto Rico for decades, CNN Business (Sept. 28, 2017)). The antiquated protectionism of the Jones Act, makes it twice as expensive to ship critical goods from the United States mainland to Puerto Rico, as it is to ship from any other foreign port in the world (Mark J. Perry, Damage done to Puerto Rico by the Jones Act illustrates the need to repeal the law, The Hill (Oct. 3, 2018)).

Remediation Plan

Remediating the damage that Hurricane Maria inflicted on Puerto Rico is essential. It is difficult to attract new businesses to Puerto Rico when electric and tele-communications services are unreliable. If there is not a long term plan to upgrade the infra-structure, then the Puerto Rican economy will continue to be moribund. The remediation plan for Hurricane Katrina took over 10 years, and involved over a $120 billion (Bruce Alpert, $120 billion in Katrina federal relief wasn't always assured, Times-Picayune (Aug. 21, 2015)). A long-term remediation plan is vital to the economic future of Puerto Rico because it gives the people of Puerto Rico hope and a reason to remain in Puerto Rico.

Government Austerity

Another major flaw with the fiscal plan is its emphasis is on government austerity. The dismantling of Puerto Rico's public and higher education systems will have horrendous consequences for the future of Puerto Rico. The massive cutback of government services will further exacerbate the migration from Puerto Rico. A result of the continued exodus from Puerto Rico is that middle class and tax base will continue to contract. Equally important, the number of qualified job applicants will also decrease making it less likely that high tech industries will relocate to Puerto Rico. Consequently, austerity is inimical to Puerto Rico's economic recovery, and it will have deleterious consequences for the future of Puerto Rico

Conclusion

The citizens of Puerto Rico, the government of Puerto Rico, the creditors of Puerto Rico, and the FOMB have a symbiotic relationship because they are inter-dependent upon each other. The FOMB has to simultaneously deal with the largest municipal bankruptcy as well as the remediation of Hurricane Maria. The FOMB has to take a holistic approach to these two major crises. The successful rebuilding of the Puerto Rican economy will enable Puerto Rico to have a stable tax base that will enable it to fund an equitable repayment plan for its creditors while maintaining government services. The FOMB has to be an honest broker and devise a fiscal plan that is equitable to the people of Puerto Rico and the creditors. This involves an unbiased analysis by the FOMB of what Puerto Rico can afford to pay or else the repayment plan will fail.

Carlos J. Cuevas is a solo practitioner in Yonkers, N.Y., and a research associate at the University of Houston School of Law.