Puerto Rico board postpones pension cuts

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The Puerto Rico Oversight Board has postponed by a year a planned cut to the central pension plan.

Since the board’s first Puerto Rico fiscal plan, released in March 2017, it has anticipated introducing pension cuts in fiscal year 2020. In the fiscal plan the board approved on May 9, it shifted these cuts to fiscal year 2021. The board cited the lack of progress in restructuring the commonwealth's debt.

“The pension cuts are a necessary part of the plan of adjustment for the Commonwealth of Puerto Rico, which the Oversight Board expects to file as soon as reasonably possible," the board said in an email. "However, even in the best case, the plan will not be filed, confirmed, and effective as of July 1, 2019, and the pension cuts cannot take effect at the beginning of the fiscal year 2020 as originally intended.

“Therefore, to be conservative, the forecast of the budgetary savings associated with the pension cut will not be included until fiscal year 2021,” the board concluded.

The board currently hopes to have a confirmed Puerto Rico plan of adjustment by the end of the calendar year.

Howard Cure, Evercore director of municipal research, said pension cuts are growing less likely. “The more they delay the tougher it’s going to be to implement it," he said. "I think they will continue to try to delay implementing any sorts of cuts in the pension plan.

“I think it shows their continued preference for their own citizens over the bondholders and other secured creditors,” Cure continued. “From the bondholder perspective, it is another upsetting piece of news.”

The October 2018 board-approved fiscal plan had anticipated net savings of $190 million from all of the board’s pension reform policies in fiscal year 2020, with $220 million of savings from a pension cut offset by the planned introduction of Social Security contributions.

By comparison, the recently adopted plan has a net loss of $45 million from these policies in fiscal 2020. The loss is due to the plan’s specification that in the coming fiscal year the government start contributing to Social Security for all police and for teachers and judges under the age of 45.

The most recently approved plan anticipates a net pension reform savings of $184 million in fiscal year 2021. The anticipated pension cut would cut spending on the central Employees Retirement System pension by 10%.

The postponement of the pension cuts comes along with a roughly $1 billion increase in the board’s approved level of spending for the coming fiscal year. In late January the board said the coming fiscal year’s General Fund should have $8.03 billion in spending. The May 9-approved plan specifies $9.05 billion for this fund.

Title II, Section 209 of the Puerto Rico Oversight, Management, and Economic Stability Act said for the board to be disbanded, there would have to be four consecutive years where spending doesn’t exceed revenues using “modified accrual accounting standards.”

In a Jan. 19, 2017, letter the board sent to Gov. Ricardo Rosselló the board said his “fiscal plan must target a structurally balanced budget by fiscal year 2019.” Fiscal year 2019 started July 1, 2018.

When asked whether the $1 billion increase in spending in fiscal year 2020 was consistent with a structurally balanced budget, the board responded: “A balanced budget cannot exclude debt payments. So the four years of balanced budgets mandated by PROMESA would start after we reach a plan of adjustment for the commonwealth and the budget includes debt payments, likely in fiscal year 2021.”

The board told The Bond Buyer that the roughly $1 billion increase in proposed spending was due to three factors: justified spending ($154 million), targeted investments ($351 million), and exogenous factors ($475 million). As for the first, the Rosselló government justified budget items in the spring that the board had originally questioned or didn’t understand. The targeted investments include reductions in Medicaid cost-saving measures and increased funding for public safety, health and education.

The exogenous factors include insurance premium increases, disaster recovery cost-share expectations and the delay of the pension reduction.

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