Despite wishful thinking by pensioners, courts can actually cut pensions. Take a look at the Commonwealth of Puerto Rico.
(Bloomberg) — Puerto Rico’s oversight board struck a tentative pension-cutting deal with retired government employees and plans to propose a debt restructuring for a major chunk of its bonds within a month, moving it a step closer to dealing with the biggest issues left in the territory’s record-setting bankruptcy.
The restructuring plan will include how to write down $17.8 billion of general-obligation bonds and other debt guaranteed by the commonwealth, as well as how to deal with $50 billion owed to the territory’s broke retirement system.
Those obligations are the largest and among the most contentious still pending two years after Puerto Rico filed for bankruptcy, seeking to recover after years of runaway borrowing to stay afloat during a long-running economic contraction.
The release of the next debt cutting plan will set off negotiations with bondholders. Its timing was disclosed by Martin Bienenstock, a partner at Proskauer Rose LLP who represents the federal board, in court Wednesday in San Juan. That came as the board also announced a tentative deal with pensioners that would cut some benefits by as much as 8.5%, which drew stark opposition from Governor Ricardo Rossello’s administration even though it protects those with lower monthly checks.
“Our position is, and will continue to be, zero cuts to pensions and we have the legal and fiscal mechanisms to do so,” Christian Sobrino, executive director of Puerto Rico’s Fiscal Agency and Financial Advisory Authority, said in a statement.
U.S. District Court Judge Laura Taylor Swain, who is overseeing the bankruptcy, said she expects the board to attempt to negotiate deals with each of the major creditor groups that are likely to oppose the next restructuring plan. Bienenstock said the board would use the mediation process set up early in the nearly two-year-old case to reach settlements where possible.
Any changes to pension benefits will need to be approved by the court. Puerto Rico’s retirement system has run out of assets , forcing the commonwealth to direct about $2.5 billion a year to cover pension payments to retirees, according to the board. That’s left its retirees at loggerheads with bondholders, who are also vying for a share of the island’s cash.
Retirees receiving pension benefits below $1,200 will see no reduction, with a maximum cut of 8.5% on retirees above that threshold, according to a statement Wednesday from the Official Committee of Retired Employees. The deal would create a pension reserve fund to help support retirement payments in later years, according to the statement. If Puerto Rico’s economic growth surpasses budgeted projections by a certain level in a given year, retirees whose benefits were cut will get a portion restored for that year.
The potential deal “is a crucial step to presenting the plan of adjustment for the commonwealth of Puerto Rico and for getting us out of the Title III debt restructuring process, while ensuring the future benefits of our retirees,” Jose Carrion, chairman of the federal oversight board, said in a statement Wednesday.
The defaulted Puerto Rican 8% general obligation bond is now trading at 47.750 with a yield of 17.964%.
The former Dean of GMU’s School of Business was Jorge Haddock, who is now President of the University of Puerto Rico. Good luck with university funding, Jorge!