Christian Sobrino, executive director of the Fiscal Agency and Financial Advisory Authority (FAFAA) warned yesterday that if the Oversight Board includes cuts to public pensions in the central government's debt adjustment plan, they will not pass any legislation leading to the implementation of the document.
The debt adjustment plan is basically the document that defines new repayment terms in a bankruptcy process. The document may include, for example, cuts to the amount owed, an extension of the debtor time to pay and changes in interest rates, among many other elements.
On Wednesday, the Board´s lead attorney Martin Bienenstock announced -during a hearing before federal judge Laura Taylor Swain -who handles Puerto Rico bankruptcy cases- that he would be submitting the document within 30 days. That plan, he said in court, will contain the agreements the Board has reached with different creditors, including the Official Committee of Retirees (COR, Spanish acronym) and the Teachers Association. Yesterday, this teachers union rejected the agreement with the Board.
Sobrino explained that implementing these adjustments requires to issue new bonds (which would be exchanged for the old bonds), and that, in turn, has to be approved by the Legislative Assembly and needs the endorsement of the government's fiscal agent, that is FAFAA.
"That plan implies issuing new debt to replace the old debt. Under state law, you need to legislate to do that kind of transaction, and this servant, as fiscal agent, has to sign. That will not happen. If that plan is tied to a pension adjustment, the plan is not confirmable," Sobrino said during a press conference at FAFAA headquarters in Hato Rey.
"There is no middle ground here. If they include changes in retirement, we don't have anything to talk about (with the board)," he added.
The Board spokesman Edward Zayas stressed that for the fiscal entity, the agreements reached with COR and the unions are an integral part of the path toward a debt adjustment plan and getting the island out of PROMESA Title III processes.
"Sobrino's comment about the government's position is not new," Zayas said in written statements.
The Board doesn't have the power to legislate
Sobrino stressed that the Board does not have the power to replace the Legislative Assembly, nor can it make decisions over the government's public policy and he warned that not even the federal court can force an elected body, such as the Legislature, to adopt any agreement.
"A lawmaker's vote is protected by the U.S. Constitution´s First Amendment. A Legislator´s vote is protected and nothing can be done to impact their right to express themselves," said the head of FAFAA.
Sobrino said that debt restructuring processes, such as the one in Stockton, California, did not require a change in the pensions.
The current fiscal plan contains pension adjustments up to a 10 percent reduction in pensions. Since the adjustments are progressive, those who receive less money will see proportionally smaller cuts than those who have higher paychecks.
According to Sobrino, the most recent agreement between the Board and COR involves an 8 percent reduction in the payroll of retired employees. He argued that actuality, this change does not represent much in fiscal terms since it advances future budget deficiencies in a single year.
"Debt restructuring does not require a change in pensions and most creditors do not look at this,” the official said.
The argument in numbers
Sobrino explained that the 10 percent cut proposed by the Board in pensions represents savings ranging from $180 million to $200 million annually.
Adjusting that cut to 8 percent, as would happen with the agreement between the fiscal entity and the Official Retirees Committee, would imply that savings would reach between $100 million and $150 million annually.
"With these aggressive cuts, the difference they have in the Board´s long-term model until 2049, the (government´s) operational deficit is just one year forward," he noted.
Sobrino said the position of the administration of Gov. Ricardo Rosselló Nevares is not to change public pensions.
The government´s position is partly based on the fact that between 2013 and 2014 many of the public employees' retirement benefits were adjusted so the adjustment they seek in this line has already been done.
"This has been the government position from the beginning," Sobrino said.
Originally, retirement systems in Puerto Rico followed a defined-benefit model. Pensions were not calculated based on the employee´s contribution to the system, but on years of service and salaries. Retirees were entitled to pensions that could reach up to 75 percent of the income they earned when they were public active employees.
The first major change to the system was in 2000 when employees joining the public service, rather than participating in the old defined benefit system, had savings accounts similar to those commonly found in the private sector known as 401k.
Between 2013 and 2014, there were additional changes legislated for the three main public retirement systems. Those new laws froze the accumulation of benefits for those employees who were still in the old pension system and place them into the defined-contribution system, as retirement savings plans are known. Also, through special laws, some benefits such as summer bonuses and medication were eliminated.