Despite the opposition of Gov. Ricardo Rosselló Nevares, Judge Laura Taylor Swain yesterday described as a “significant” step the agreement that the Official Committee of Retirees (COR, Spanish acronym) negotiated with the Oversight Board and which would serve to address the government's main debt under PROMESA Title III.
During the Title III cases general hearing, the judge in charge of the largest debt restructuring in the U.S. municipal history welcomed the agreement between the Board and COR, as well as two other deals with the Puerto Rico Teachers Association (AMPR, Spanish acronym) and the United Public Servants of Puerto Rico (SPU, Spanish acronym).
She said that there will be parties - including the government itself - who will oppose such proposals and that it will be up to the court to examine them and determine their fate. But she also stressed that these agreements show that there is an "approach" to complete the island´s debt restructuring process.
A long-term solution
Yesterday, after almost a year of negotiations, COR announced that it had agreed with the federal entity overseeing the island's public finances to limit cuts to public pensions to 8.5 percent.
The agreement also establishes that the cut will only apply to retirees with an income higher than $1,200 a month, excluding the government contribution to the medical plan -that remains intact- as well as Social Security income.
According to COR, instead of three out of four retirees suffering an initial cut of up to 25 percent, as the Board intended, the agreement considers cuts between 3 percent and 8.5 percent for approximately one out of four pensioners.
According to the group authorized by the U.S. Trustee to negotiate Title III cases in Puerto Rico, the agreement benefits some 102,000 retirees under the Public Employees, Teachers and Judiciary retirement systems who will see no cuts in their pensions.
In an interview with El Nuevo Día, Robert D. Gordon, COR's lead legal advisor and partner at Jenner & Block; COR president Miguel Fabre, and FTI Consulting's group financial advisor and managing director Sean Gumbs said the agreement with the Board represents the best alternative to the devastating scenario posed by the federal entity two years ago.
Gumbs stressed that above all, the most significant thing about the agreement is that COR secured a commitment from the Board so that some of the money going into the General Fund, from which pensions payments flow, will go to a pot that the government will not be able to touch.
This way, if at any point the government faces budget deficits, which could happen as soon as five years from now according to the certified fiscal plan, there will be a cushion to mitigate that impact and pensions will be paid.
The reserve for pension payments would go to a fund, Gumbs said, and would be financed with an injection of $175 million throughout the next eight years for a total of $1.44 billion.
Gordon also stressed that this fund will be managed by a board composed of retirees who will be elected by retirees and will have an independent administrator.
"We understood that there was no alternative. Part of the problem here is that we knew what the Board's position was (cutting pensions), and we have a fiduciary obligation to 167,000 retirees. We could not leave the negotiating table because they would not have had representation. It was our duty to be at the negotiating table because it is a court mandate," Fabre said.
According to Gordon, the group, which represents some 167,000 retired public employees, is opposed to any cut in pensions. But he explained that, since the Board believes that creditors have to contribute to the island's fiscal recovery in order for the court to approve the adjustment plan, they preferred to reach an understanding before exposing the group to an adverse ruling in court.
A crucial step
José B. Carrión, president of the Board, said that once the deal with COR is completed it will represent another milestone that will allow Puerto Rico to come out of bankruptcy and will make it easier for businesses to invest, for the economy to grow, and for the people of Puerto Rico to prosper
According to Carrión, the agreement 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.”
During the Title III general hearing, the Board´s lead attorney Martin Bienenstock said his client is getting ready to present the government's adjustment plan in the next 30 days.
Objection to the Agreement
However, and as anticipated, La Fortaleza did not welcome the agreement held within the federal district court in Hato Rey.
Public Affairs Secretary Anthony Maceira said the agreement would only achieve annual savings for about $100 million, a figure he understands shows that the Board's position to cut pensions is ideological.
Since 2017, when the PayGo system was created under Law 106, pension payments flow through the General Fund. But over the past two years, the government has not fully complied with that statute, which requires separating part of the budget from agencies and municipalities for that purpose.
This month, Rosselló Nevares even approved a law - which the Board objects to - so that, from now on, pension payments will not be a responsibility of municipalities.
"Our financial models prove that it is viable to restructure debt without affecting our retirees," said Christian Sobrino Vega, director of the Fiscal Agency and Financial Advisory Authority (FAFAA)The government's opposition to the agreements signed by the Board with COR, AMPR and SPU was not just a statement. This, because during the hearing, FAFAA lawyer Peter Friedman told Swain that his client simply could not endorse an agreement that was detrimental to one of the most vulnerable sectors in Puerto Rico.
Friedman said that over the past two years, the government has shown interest in working with creditors on a consensual basis, but that there will be no going back on the pensions issue.
"We believe the Board is exceeding its powers again," Friedman said, indicating Swain that they will object to the agreement with COR and also those that would extend the term of about 15 collective bargaining agreements for five years and raise the health plan's contribution from $125 to $170 per month.
Although the Board and COR would have reached an agreement on a claim estimated at $50 billion, this is not the end of the claim that both parties initiated to cancel the $3 billion in bonds issued by the ASR.
Similarly, the deal with the retirees comes amid uncertainty regarding the constitutionality of the Board, which is operating under the extension granted by the First Circuit Court of Appeals until July 15.