Puerto Rico Board reduces pension cuts

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The Puerto Rico Oversight Board reached a deal to reduce proposed cuts to government pensions in what it called a “crucial step” toward presenting a restructuring plan for the central government's $25 billion of bonds and loans.

The agreement negotiated with the Official Committee of Retirees lowers the maximum pension cut to 8.5% from the 25% contemplated in the board's May fiscal plan. Some market participants said the deal announced on Wednesday was premature and the board should have settled other issues first, such as its effort to declare portions of Puerto Rico's debt illegal.

“How do they even know what they have to work with,” asked Shaun Burgess, portfolio manager at Cumberland Advisors, which owns insured Puerto Rico debt. “The questions about debt validity [in the bankruptcy process] are very serious and have to be answered before this process can continue in my opinion. Otherwise this is all just an exercise in futility.”

Inteligencia Económica Chairman Gustavo Vélez said deal was very good for pensioners as unsecured creditors. However, Velez said he was concerned about the feasibility about Puerto Rico’s government allotting more than $2 billion a year from the General Fund for pensions. If there were higher haircuts for pensions, he said, there’d be steep costs to the economy and thus, ultimately, for bondholders.

Before the board announced the deal, Gov. Ricardo Rosselló through his deputy Christian Sobrino Vega, made clear his opposition to any pension cuts. On Wednesday morning Sobrino Vega, executive director of Puerto Rico’s Fiscal Agency and Financial Advisory Authority, said that the new deal would hurt more than 65,000 retirees.

In the board’s May-certified fiscal plan, the board had said all those scheduled to receive more than $1,000 per month in pensions would see cuts. The new deal provides that cuts will only affect those receiving more than $1,200 per month. In the old plan those who received Social Security in addition to their pensions may have seen cuts to their pensions if they received as little as $600 per month. The new deal ignores retirees’ Social Security income.

The deal also says that if Puerto Rico’s economy exceeds financial projections, some of the excess government revenue would go retirees to reduce the cuts’ impact. The deal would also set up a multibillion-dollar pension reserve fund to help fund pensions in later years, when the board expects the government to be more pressed for money.

The deal also guarantees monthly medical insurance benefits.

While the board and the retirees committee hailed the deal, some financial analysts questioned it.

“All too often pension discussions are conducted as though there is some silver bullet. There is not,” said Robert Chirinko, professor at the University of Illinois at Chicago. “One party’s gain is another party’s loss. Relative to the [board’s] proposal, who has lost? Puerto Rican taxpayers? Bondholders? The U.S. Treasury and hence U.S. taxpayers? Current higher-income pensioners? Future pensioners? And by how much?”

The board said that fiscal and legal constraints forced it to propose cuts to pension benefits and other changes to pensions. In the Puerto Rico Oversight, Management, and Economic Stability Act’s Title III bankruptcy process, pensioners are considered unsecured creditors and their treatment in a plan of adjustment will have to be approved by the Title III court, the board said in a press statement.

On Wednesday, after the pension reform was presented at the Title III omnibus hearing in San Juan, bankruptcy Judge Laura Taylor Swain said the pension deal was a significant step for the restructuring.

“Although the Committee of Retirees would have preferred no cuts, 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,” said Committee Chairman Miguel Fabre. Under the deal 61% of retirees would avoid any cut to their benefits.

“Overall it’s a good thing because it advances negotiations with all stakeholders,” said Antonio Fernós Sagebién, associate professor at Interamerican University of Puerto Rico.

AllianceBernstein Municipal Credit Analyst John Ceffalio agreed: “I see it as a milepost on the road to filing a proposed Plan of Adjustment for the central government.”

The deal increases the likelihood of the plan being approved, said Vicente Feliciano, president of Advantage Business Consulting.

On Wednesday board attorney Martin Bienenstock said the board planned to file a central government plan of adjustment with the bankruptcy court within 30 days. This plan would set down how the central government’s debt would be restructured. While a judge would have to approve it, PROMESA gives a great deal of power to the board to determine the plan’s form and little power to the judge to review it.

At Wednesday’s hearing Peter Friedman, the lawyer representing FAFAA and the governor, said it was the government’s responsibility to protect the most vulnerable and thus reject any cuts to pensions. The board’s actions with pensions were part of its pattern of attempting to take over things it has no right to take over, he said. Due to past freezes on cost of living adjustments, the retirees have already seen substantial pay cuts.

“Our financial models show that it is viable to restructure the debt without having to impact our retirees,” Sobrino Vega said in a press statement.

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