The federal board overseeing Puerto Rico’s bankruptcy agreed Thursday to drop its opposition to legislation enacted earlier this week authorizing the island to raise new debt needed to complete its debt restructuring plan.

The disagreement between the oversight board and the U.S. territory’s government had concerned public worker pensions, among other matters. Resolving the disagreement averts the threat that a restructuring plan negotiated over four years could be discarded and the case dismissed by a bankruptcy judge.

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The federal board overseeing Puerto Rico’s bankruptcy agreed Thursday to drop its opposition to legislation enacted earlier this week authorizing the island to raise new debt needed to complete its debt restructuring plan.

The disagreement between the oversight board and the U.S. territory’s government had concerned public worker pensions, among other matters. Resolving the disagreement averts the threat that a restructuring plan negotiated over four years could be discarded and the case dismissed by a bankruptcy judge.

The oversight board’s announcement paves the way for the territory to move ahead with hearings scheduled to start Nov. 8 in U.S. bankruptcy court in San Juan. Puerto Rico’s debt adjustment would reduce the island’s $33 billion in bonds and other debt to $7 billion in the largest-ever municipal bankruptcy case.

Discussions between the oversight board and Puerto Rico’s government over legislation to raise new debt have been going on for weeks.

As part of the negotiations, earlier this month the oversight board agreed to remove from Puerto Rico’s debt-adjustment plan proposed cuts in pension payments to retired government employees, according to a Monday court filing by lawyers for Gov. Pedro Pierluisi and a letter from the oversight board to the island’s government.

The oversight board also agreed to other concessions, including increased funding for the University of Puerto Rico, according to the court filing and the letter.

Judge Laura Taylor Swain, who is overseeing Puerto Rico’s bankruptcy, had warned earlier this month that she might be forced to dismiss the case if there isn’t a plan that all parties can agree on soon.

“I’ll be frank with you, my patience is wearing thin…If there are no prospects for prompt consideration of a plan, the court may be forced to consider” dismissing the case, she said.

Over its four years in bankruptcy, Puerto Rico had run up close to $1 billion in professional fees through July.

Under the proposal, creditors would exchange $18.8 billion in general obligation debt for a mix of $7 billion in cash and $7.4 billion in new bonds, as well as tradable securities known as contingent value instruments that pay out if tax collections exceed projections.

Write to Soma Biswas at soma.biswas@wsj.com