The Puerto Rico Oversight Board threatened to sue if a recently enacted law barring the government from supporting the proposed Plan of Adjustment is not repealed by Thursday.
In a letter to the leadership of the local elected government late Tuesday, the board suggested it would sue to stop implementation of Act 7-2021, signed on June 7 by Gov. Pedro Pierluisi, which bars the government from supporting the proposed Plan of Adjustment, any cuts to pensions or “essential services,” or any fee increases or tax increases to support paying debt.
The local government is trying to pressure the board to approve a plan of adjustment without any pension benefit cuts, said Puerto Rico attorney John Mudd. It is unclear if the local government is just threatening to not approve the POA or if it is really willing to let the POA completely collapse.
The board sent its letter to Pierluisi, Puerto Rico Senate President José Luis Dalmau, Puerto Rico House of Representatives Speaker Rafael Hernández Montañez, and Puerto Rico Fiscal Agency and Financial Advisory Authority Executive Director Omar Marrero Díaz. It asked the local government to tell the board by noon on Thursday that Act 7 would not be implemented and would be repealed.
“Absent confirmation of both items, the Oversight Board will take any such actions it deems necessary … including seeking remedies and penalties to nullify Act 7 and to prevent the implementation and enforcement of the Act,” Oversight Board Executive Director Natalie Jaresko said.
"The act's promised benefits to retirees are not financially attainable," Jaresko said. "Negotiations would recommence, creditors unpaid for five years would urge the court to let them enforce their claims by grabbing the commonwealth's revenues, and the Oversight Board's tenure would be extended. Thus, despite your effort to support retirees, the act seriously harms retirees and the commonwealth."
Pierluisi emphasized the parts of the law that rejected the proposed Plan of Adjustment’s cuts to public pensions.
Under the law, the government would not support any POA bond or debt adjustments if a pension cut is involved. The board has said it can cut pensions without local government support.
Local government action is needed to achieve some parts of the plan of adjustment but not others.
Most observers say the local government would normally have to enact legislation to issue new bonds for the POA to go forward.
In addition, according to Pierluisi, the law “rejects any POA whose viability or guarantee of payment for debt service requires increasing or establishing regressive taxes, rates or mechanisms that causes water, electricity, transportation, education and other essential public services to be more expensive.”
The law “rejects any POA whose viability or guarantee of payment for the debt service requires cuts to essential public services provided by the Government of Puerto Rico, its public corporations and municipalities, including, without limitation, education, health, environmental protection, housing, sanitation and solid waste management, security and emergency management, sewage and water processing, electrical energy, road infrastructure and mass transportation,” according to Pierluisi’s office.
The law mandates that $4.5 billion from government accounts be transferred to a newly created pension trust, which is not part of the board’s current fiscal plans. The board expects to use the government’s monetary savings for paying creditors, capital expenses, as a “rainy day” fund, and to deal with deficits that it expects no later than fiscal year 2036.
The board will nullify Law 7, said Armando Valdés Prieto, opinion writer and former Puerto Rico government official. “The more important question is whether or not the board will get the legislature to approve the legislation it will need to ratify the agreements with bondholders. On that point I am not so certain.”
Howard Cure, director of municipal bond research at Evercore, said, “I think any time you limit your flexibility by putting off-limits expenditure cuts or increases in revenues, you are creating even more pressure on the economic recovery to meet or exceed projections. In Puerto Rico’s case, this is particularly worrisome given the reliance on onetime federal aid (including the need for advantageous federal tax legislation), the questions surrounding the post-pandemic economic recovery and declining demographics.”
The board has been requiring governors to provide statements as to the consistency of laws with board-approved fiscal plans and the Puerto Rico Oversight, Management, and Economic Stability Act. Pierluisi sent a seven-page statement to the board saying the new law was inconsistent with these things. In its letter the board agreed.
