Oversight Board and Puerto Rico Government Clash over Pensions

Puerto Rico Governor Ricardo Rossello Nevares and the board that PROMESA inserted into the territorial government to control matters affecting finances appear to be headed for a confrontation in Federal court next month over the board’s determination Friday to cut the hours of insular government employees two days a month beginning September 1st.

After the Financial Oversight and Management Board’s decision, the Governor wrote President Trump and congressional leaders and explained in a televised address why he was refusing to implement the board’s direction and considers it advisory instead of mandatory. His Secretary of the Governorship, William Villafane, followed up with a directive to all agency heads to ignore the Board’s order.

The Oversight Board’s determination will hold unless the Rossello Administration convinces it measures are being taken that will make up a $218 million budget gap. Otherwise, the Board will, presumably, go to court for a judicial order.

Another conflict is looming, however, over government pensions. The dispute was previewed during the Board meeting Friday and in interviews with the leading Board Member on pension issues, Andrew Biggs, and Rossello’s non-voting representative on the Board, Christian Sobrino.

The 10-year Fiscal Adjustment Plan that the Board approved in March — which Rossello claimed as his own, although it was modified before and after his submission of the plan — calls for a 10% reduction in pension payments.

The budget for the fiscal year that began July 1st, which the elected Government submitted and the Board approved with amendments, however, calls for the Government to pay 100% of retirement benefits during Fiscal Year 2018 with General Fund revenue. The two biggest of the three pension systems, the main Government Employees Retirement System and the Teachers Retirement system, are expected to run out of money this month and next month, respectively.

The systems cover 157,854 current employees and 168,833 retirees and disabled individuals. There is also a small Judiciary Retirement System. Payments from the systems total about $2.5 billion a year.

The Governor is also seeking Legislative Assembly approval of a reform of the two large systems that would continue to make all payments currently due with General Fund revenue. In addition to combining the two systems, it would switch the system for current and future employees from being a defined benefit plan to being a defined contribution plan, with contributions going into a segregated fund outside of the Government’s control. One reason for depletion of the systems is that the Government has “borrowed” contributions.

Rossello’s legislation passed the House of Representatives last week, and is expected to be considered by the Senate this week.

In explaining the Board’s alternative, Biggs contended that the Rossello Administration was “not willing to implement the cuts proposed in their own Fiscal Plan.”

The Board’s plan, based on a study by the Pension Trustee Advisors firm, would reduce pensions to half of current beneficiaries by 5-15% and those to another quarter of beneficiaries by 15-25%, for an average cut of approximately 10%. About 75% of pensioners would be affected. This includes retirees who do not receive Social Security payments and currently have pensions paying more than $1,000 per month as well as those who receive Social Security and have pensions paying more than $600 a month.

The reduced benefits would take effect 90 days after the PROMESA Title III bankruptcy court approves a debt adjustment plan.

The Board would also switch current employees from a defined benefit plan to a defined contribution plan.

Reacting to Biggs’ statements, Governor’s representative Sobrino said that the Rossello Administration would not change its plan and charged that the Board has “moved the goal post.” He asserted that the Board initially sought to save $83 million per year through a reform, recognizing that the Board’s plan would reduce spending “well above the $83 million.”

He and others insisted that the Board plan would be “counterproductive” economically.

A spokesperson for the retirees committee in the Title III bankruptcy case said that the group would challenge the Board’s plan.

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