Despite the Puerto Rico government´s opposition, the Oversight Board decided to leave the future of some 325,860 active and retired public employees in the hands of Judge Laura Taylor Swain and will submit the central government's adjustment plan under PROMESA Title III in a matter of weeks.
That adjustment plan, unless some more favorable agreement is reached with the Official Committee of Retired Employees of the Commonwealth of Puerto Rico (COR), will include cuts to the pensions of some 167,000 people that have been discussed over the last two years.
For a teacher or a police officer, a janitor or a retired government nurse, as well as for all those who will retire after a lifetime of public service, the scope of the Board's plan could range from no cut in their pay to the loss of a quarter of their small monthly paycheck.
Based on the Board´s documents, a public employee with a $ 775 monthly pension could stop receiving about $75 a month, which totals $900 a year.
The plan to be proposed also includes freezing defined benefits for participants of the Judicial Retirement System and the Teachers Retirement System (SRM) who are still working as well as a number of adjustments that have not been implemented by the government yet.
For financial experts, the adjustments should achieve about $694 million in pension payments savings or an average annual reduction in the so-called "Pay-Go" payroll of $180 million. By October, that savings goal was about $714 million.
The Board´s Executive Director Natalie Jaresko told El Nuevo Día yesterday that if they can complete the necessary documentation, the entity could submit the central government's debt adjustment plan in the second half of June.
The goal of the Board is for the judge to accept its proposal rather than, given the limited resources to pay all the government's creditors, applying additional cuts.
"There has been no change in the pensions reform," Jaresko said.
The certified fiscal plan states on page 129 that "Puerto Rico's retirement systems must be further reformed to reduce costs and maintain adequate funds for current and future retirees."
Jaresko said that if Judge Swain endorses the adjustment plan, the government will be called to implement the pensions reform despite Rosselló Nevares strong opposition.
However, if Judge Swain revokes the adjustment plan, Jaresko said that Puerto Rico will return to the starting point that gave way to PROMESA and the Board.
The unfinished reform
The reform has four major components.
Although there is no definitive amount to date,the reform contemplates returning to active public employees the savings they contributed to their retirement for years and that were used to pay current pensions. As part of that plan, the Board also proposed the creation of defined-contribution plans for public employees or the equivalent of 401(k) plans in the private sector.
The Rosselló Nevares administration is already implementing this strategy.
The second component of the pensions reform involves encouraging police officers, teachers, and judges who do not contribute to Social Security in the United States to do so.
The government has already taken actions to include La Uniformada (Puerto Rico Police Department) members, but currently, the Board does not clearly know what has been done to implement that strategy with teachers.
According to the certified fiscal plan, the government must approve legislation on or before June 30 for these public employees to contribute to Social Security.
However, the hard part seems to be cuts to pension benefits proposed by the Board but that have not been implemented.
The Board proposed to freeze pension benefits in the SRM and the Judiciary branch.
Although, by 2013, former Governor Alejandro García Padilla promoted changes to both systems to change the formula that determines payments, the contractual obligation to pay a pension remained in place for both cases.
The Board proposes to definitively close that door, and that teachers and judges save for retirement as in the Retirement Systems Administration (ASR, Spanish acronym).
The results of bankruptcy
Although since the Board started operating almost three years ago, there have been talks over pension cuts, it was not until now that Title III cases are advancing that citizens are beginning to see the direct impact of restructuring plans.
In that sense, the pensions reform will arrive at Swain's office in a matter of weeks at a time when she has before her consideration the final agreement with some bondholders of the Electric Power Authority (PREPA). In that case, while pensions would be cut, an increase in electricity rates is looming, which will start at 5 percent and would reach 28 percent in three years.
According to Jaresko, in the case of pensions, if there were a change in the numbers, it would be a consequence of new actuarial information and the delay in the implementation of the reform in the retirement systems.
However, none of those changes changed the need and urgency to implement cuts, according to Jaresko.
Broadly speaking, to implement cuts, the Board decided that no retiree with a monthly pension of less than $1,000 will receive an adjustment. The rest of the retirees, some 110,220, would see a reduction in their pensions.
About two years ago, the estimated number of affected retirees was higher.
However, despite the Board's insistence on an average 10 percent cut, the president of the Official Committee of Retired Employees (COR), Miguel Fabre, stressed that actually, pensioners may suffer an adjustment close to 25 percent.
According to the former judge, the Board's plan requires dividing the impact of the cuts proposed by the fiscal entity, excluding retirees who will see no adjustment. As a result, Fabre thinks that the cut proposed would be more severe in a sector of the population that has been losing benefits for years.
"I told the members of the Board to go to any pharmacy, sit there and listen to the elder asking the pharmacist to only give them half the prescription because they can't afford it," Fabre said, in reiterating that a monthly pension of $1,000 is not enough to live on.
Fabre and the team of advisors and lawyers represent pensioners in the negotiations with the Board.
COR has been silently negotiating with the Board for months without mediators.
Fabre made it clear that COR opposes the cuts proposed by the Board and the group is pushing for changes, both in the number of people who could be affected as in the scope of the cuts.
Until yesterday, however, Fabre accepted that there is not enough money to pay for pensions and other government obligations.
"We have to accept that pensions will undergo modifications," admitted Fabre, confident that the negotiations will result in a less severe impact on the group he represents.
The annual payment of pensions under the "Pay-Go" system would be close to $2.443 million starting next fiscal year. The figure exceeds the collections of the so-called 4 percent tax for an entire year or represents a few cents for each dollar that enters the Treasury.
Despite that reality, Fabre said that COR will continue negotiations because leaving that space will open the door for other creditors seeking to advance their cases.
"We are going to continue negotiating," said the president of the American Federation of Teachers (AMPR), Aida Díaz, noting that they are also talking to the Board in an attempt to convince them that their proposal will lead teachers to poverty.
"The Board has been open, but no decision has been made," Díaz said.
AMPR asks that if there were any cuts to teachers' pensions, then they could offer some other benefit or incentives as a counterweight.
According to Díaz, the Board agreed that once they file the adjustment plan, teachers will have the option to vote for it, but there have been no other concessions.
Fabre and Díaz agreed that the pension reform has such an impact on the emotional state of retirees that there is no time to lose.
"We need this situation to be clarified once and for all. Teachers cannot continue in this uncertainty," Díaz said.
According to the teachers leader, the concern for the future is such among educators that next June, some 2,800 teachers will leave the classrooms and retire.