Puerto Rico board seeks legal action against municipalities, authorities over pension shortfall

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The Puerto Rico Oversight Board referred 10 municipal governments and three commonwealth-wide authorities for legal action over their alleged failure to transfer $4.5 million withheld from paychecks to their employees retirement accounts.

The move marks the latest clash with the local government by the board, which also has sought to cut pension payments by 10% as part of its mission to overhaul fiscal management in the territory. The island has $49 billion of unfunded pension obligations.

According to the board, Puerto Rico’s Act 106-2017 “provides that the head of a government entity that knowingly and without just cause fails to remit employee contributions to their defined contribution account could be subject to significant penalties.” The practice may also violate Title 18 of U.S. Code 666(a)(1)(A).

The board referred the matter to the Puerto Rico Secretary of Justice Wanda Vázquez Garced and the U.S. Department of Justice.

Vázquez Garced said she handed the matter to Puerto Rico’s Public Integrity Division and Comptroller Office. “If these allegations are correct, it is unacceptable,” she said in a tweet.

Some past Puerto Rico governments failed to make sure that retirement amounts withheld from employee paychecks went to retirement accounts, the board said in a written statement.

“Decades of fiscal mismanagement decimated Puerto Rico’s pension funds,” said Puerto Rico Executive Director Natalie Jaresko. “That is why we are extremely concerned about the failure to transfer employee contributions to their individual defined contribution retirement accounts.”

The Metropolitan Autobus Authority with $2.07 million, Arecibo government with $1.12 million, and the Guanica government with about $232,000 had the largest fail-to-transfer amounts.

Additionally, 15 public corporations and 13 municipalities have failed to make their required pay-as-you-go contributions since fiscal year 2017 for the current retirees’ pension system. As of April 30 they had failed to transfer about $340 million to Puerto Rico’s central government, which uses the money to pay retirees’ pensions.

The entities that owe the most to the PayGo pension system are the Puerto Rico Aqueduct and Sewer Authority ($67.4 million) and San Juan ($72.4 million).

The $340 million includes both failures to transfer the PayGo as well failure to transfer employee withholdings.

The Puerto Rico Office of Comptroller is among the entities that have failed to transfer PayGo sums to the Commonwealth government, according to the board. One of the comptroller’s main duties is reviewing other Puerto Rico government entities to assure that they are using government money properly.

Since April 30 the board has sought assistance from the Puerto Rico Retirement Board to address the failures to make the PayGo and withholdings transfers.

Besides the board’s work on employee contributions and PayGo, the board’s struggle with the local government took another form on Wednesday. While the board submitted its budget for consideration to the local legislature Tuesday, on Wednesday Gov. Ricardo Rosselló, surrounded by the leaders of the Puerto Rico Senate and House of Representatives, said the legislature would be considering his version of the budget and not that of the board.

The leaders of the Puerto Rico House and Senate are members of the same party as Rosselló.

The board and the local government have been struggling over control of the budget, expenditures, and other matters since at least spring 2017. The outcome of the struggle will ultimately impact the largest municipal bankruptcy in U.S. history.

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PROMESA Commonwealth of Puerto Rico Puerto Rico Aqueduct & Sewer Authority Puerto Rico Infrastructure Financial Authority Puerto Rico Highway & Transportation Authority Puerto Rico