Puerto Rico's biggest battle with the federal Oversight Board is about to escalate as the board pushes its plan to cut government pension benefits.
The board has said that it will institute an average pension benefit reduction of 10% in the coming fiscal year, which starts July 1. Gov. Ricardo Rosselló has rejected any pension cuts.
The governor is supposed to present a proposed budget consistent with the board's six-year fiscal plan within the next few weeks, which would indicate his proposal for pension levels in the coming fiscal year. The island's Employees' Retirement System has $3.2 billion of bonds outstanding.
Rosselló “has staked plenty of political capital on maintaining the pensions,” said Vicente Feliciano, president of Advantage Business Consulting.
Howard Cure, director of municipal research at Evercore, said the legislature and governor have been consistent in their defense of pension benefits.
"This reflects a recognition of the importance of the public sector both as a political constituency as well as the fact that the commonwealth still has a disproportionately high percentage of the island’s employees in the public sector,” Cure said. “Any cut in benefits would therefore have a significant negative impact on the economy.”
A board spokesperson said, “The Oversight Board is confident … the reduction in pension benefits and freeze on benefit accruals, can be accomplished through the plan of adjustment.”
The board plans to submit plans of adjustment for the island’s three public sector pension systems this year, a spokesperson said.
The government is already paying the ERS benefits on a pay-as-you go basis. Without substantial changes, the others would also become pay-as-you-go in the next few years. In the current fiscal year, pension funding amounts to 26% of General Fund expenditures.
“Expenditures are being reduced throughout the commonwealth’s budget and contractual debt service remains unaffordable,” the board said in the fiscal plan. “A 10% average reduction in pensions is appropriate and necessary.”
For comparison, the board has suggested there will have to be 75% or greater cuts to Puerto Rico’s outstanding debt.
The board’s Oct. 23, 2018-certified Puerto Rico fiscal plan has four deadlines in 2018 for reforming the pension system. Of these, only one has been largely been met by the publication date of this story.
According to the plan by Sept. 30, 2018, all police under age 40 were to start contributing to Social Security. This didn’t happen.
By Dec. 31 legislation was supposed to be adopted to mandate 10% cuts in pensions, and legislation was supposed to be passed to enroll teachers and judges under 40 in Social Security. Neither of these things happened.
By Dec. 31 legislation was supposed to be adopted for a freeze on the Judicial and Teachers' Retirement systems' defined benefits and to transition to defined contribution accounts. In January and February the government completed setting up this defined contribution system and the related accounts.
While the board said that it was confident it could achieve a reduction in pension benefits and freeze on benefit accruals, “Other elements, such as securing access to social security, will ultimately, require action by the local government and legislature.”
Before the board submitted a plan of adjustment, the board would have to put the Teachers' and Judicial Retirement systems into Title III bankruptcy. The biggest system, the Employees' Retirement System, is already in Title III.
Both Cure and Feliciano said the dispute between the board and the local government will likely end up being resolved through a ruling by Title III bankruptcy Judge Laura Taylor Swain.
“On the one hand, it is normal for pensioners to face cuts during a bankruptcy proceeding since pensioners are creditors," Feliciano said. "On the other hand, pensioners in Puerto Rico have already faced pension cuts in the past as the government tried to avoid bankruptcy, and pension levels are way lower than in the United States.”
The Puerto Rico Retirees Committee didn’t respond to a request for a comment for this story.
Bondholders filed a motion on Feb. 20 to be named trustee of the ERS. On Feb. 28 the board and Puerto Rico’s central government filed a stipulation in the court proceeding that gave the bondholders additional time to make their claims. In response the bondholders withdrew the motion for a trustee “without prejudice.” This means they retain the right to file an identical motion at a later date.
The bondholders said on Feb. 28 that they were withdrawing their motion to give more time for discussions aimed at reaching a consensual solution with the board.
