Puerto Rico was hit with two lawsuits Monday that for the first time challenge the constitutionality of a federal control board overseeing the island's finances and its power to start a bankruptcy-like court process for some of the U.S. territory's more than $70 billion public debt.
One of the lawsuits was filed by U.S. hedge fund Aurelius Capital Management, which holds more than $470 million in Puerto Rico general obligation bonds, among other debt. It is the same hedge fund that was involved in a 15-year dispute over defaulted bonds issued by Argentina.
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The second lawsuit was filed by the UTIER, a Puerto Rico union that represents about a third of the 9,550 employees at the island's Electric Power Authority.
Both argue that the board's seven members were never approved by the U.S. Senate and thus they have no power.
"Because the board is unconstitutional, its acts are void," Aurelius said in its lawsuit.
A spokesman for the board declined to comment on a pending legal matter.
Last year, the U.S. Congress approved a law that created the board in response to the Puerto Rico government's financial crisis. The measure gives the island a way to restructure its debts since there are no federal or local laws allowing its municipalities or public agencies to declare bankruptcy. Board members were chosen by the administration of then U.S. President Barack Obama from a list submitted by congressional leaders of both parties: three members from the Democratic list and four from the Republican one.
The board recently announced it would go to court to restructure a portion of the island's public debt after negotiations with creditors fell apart amid multimillion-dollar defaults that have sparked a flurry of lawsuits. The board also has demanded more austerity measures for the government, including furloughs that will start Sept. 1 and apply to all public employees except police.
Puerto Rico Gov. Ricardo Rossello has said he will not impose furloughs and will go to court if needed seeking to block them.
"If they send me to jail, so be it," he told radio station WKAQ on Monday.
Puerto Rico has spent more than a decade in a recession that has left the government short of revenues and also prompted nearly a half million people to flee the island in search of jobs and a more affordable cost of living.