Puerto Rico Oversight Board director defends proposed pension cuts

The executive director of Puerto Rico's Financial Oversight and Management Board on Wednesday defended the proposed public employee pension cuts, because they provide a pathway to 30 years of actuarial balance.

Natalie Jaresko, the Oversight Board’s executive director, told reporters at a Washington briefing that taking no action on the pensions is not an option because the retirement system is bankrupt. Disagreement on the proposed cuts is one the few remaining major obstacles to a restructuring of the commonwealth’s debt as officials work toward a goal of exiting bankruptcy in the first half of 2020.

“From my perspective, the end is in sight,” Jaresko said Wednesday.

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Puerto Rico Gov. Ricardo Rossello has opposed the pension cuts, which he has called politically and ideologically motivated.

Christian Sobrino Vega, executive director of Puerto Rico’s Fiscal Agency and Financial Advisory Authority, has said that the new deal would hurt more than 65,000 retirees.

Jaresko compared the commonwealth’s government pensions to state pension systems, showing reporters a graph that listed Puerto Rico at the bottom.

“Here is Puerto Rico, which is negatively funded,” she said. “The next state in the list is New Jersey, which is at 30%.”

The Oversight Board has reached an agreement with the Committee of Retirees that makes a flat 8.5% cut to pensions greater than $1,200 a month and does not change payments to the 61% of current retirees who receive monthly pensions of $1,200 or less. If active employees are added to the group, there would be no pension cut for 74% of plan participants.

Miguel Fabre, chairman of the Committee of Retirees, issued a statement last week saying that the group would have preferred no cuts, but explained, “we believe that significantly worse cuts would have been sought by the [Oversight Board] in the bankruptcy process and that ignoring said reality would have been irresponsible from our part and lethal to our community of retirees.”

The agreement requires the commonwealth to make a payment of at least $175 million for 8 years to fund a pension reserve, which makes the plan actuarially balanced for 30 years.

The governor’s administration opposes the pension reserve because it would be managed by an independent trust, Jaresko said.

On Tuesday, Rossello instead proposed making a $1.4 billion payment to the Accounts Program of Savings, better known as "Reforma 2000," and the Hybrid Defined Contribution Program between the years 2000 and 2017. Employees would receive their share of the money at the time of their retirement.

Jaresko said the pension underfunding needs to be resolved under the commonwealth’s debt restructuring because it is the largest part of the bankruptcy being overseen by federal Judge Laura Taylor Swain.

“The board does not want to cut pensions, but we do believe that their $50 billion claim in court will not be ignored and that the creditors will insist on some form of impairment,” Jaresko said. “They are the single largest class in this bankruptcy.”

In the larger picture, the overall bankruptcy reorganization has made a great amount of progress.

“We’ve certified and updated the fiscal plan for Puerto Rico,” she said. “We sent a budget for fiscal year ’20 to the Puerto Rico legislature. And we’ve entered into a series of agreements that I think will help Puerto Rico turn the corner from this crisis.”

Jaresko said the Oversight Board has reached an agreement to reduce claims from $35 billion to $12 billion that makes the debt payments affordable and sustainable, secures pensions for the next 30 years, mitigates litigation costs and provides a path for exiting the Title III bankruptcy next year.

Debt service would be reduced to $44 billion from what would have been $82 billion over the next 30 years.

Annual maximum debt service, including COFINA payments, will be reduced to $1.5 billion from $4.2 billion, she said.

And the percentage of the commonwealth’s revenues dedicated to debt payments would be reduced to under 9% from more than 28%, according to Jaresko. Those percentages don’t include federal funding.

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Rossello, who held a similar financial briefing for reporters in Washington last week, also expressed optimism about the commonwealth’s finances.

He outlined the steps his administration has taken over the last two years which have included reducing payroll by 20%, reducing the number of agencies to 102 from 124, labor and human resources reforms, streamlining government permits, pension reforms, procurement reform and local tax reforms that have included a local earned income tax credit.

But Rossello opposes what he has felt has been micromanagement by the Oversight Board and intrusions into the commonwealth’s day-to-day operations.

Sobrino, who joined Rossello at the Washington briefing, said the commonwealth’s fiscal plan has projected debt payments for Puerto Rico if it placed in the same category is as the top 10 states in debt service or alternatively, to the top 25 states.

“Since it’s a matter of negotiation between bondholders, the Oversight Board and Puerto Rico, we are not going so far as to say this is the exact number,” Sobrino said. “But you can project based on the amount in the debt sustainability chapters what that is.”

But Sobrino said the commonwealth’s current $6.7 billion cash balance does not represent how much it is capable of paying in debt service. The cash balance is not only a result of not paying debt service, but also reflects budgetary cuts, increased collection and increased revenue, said Sobrino.

Rossello added that the commonwealth’s government has spent more than $4 billion on the pay-go payments to the new defined contribution pension system.

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