Puerto Rico Board’s Proposed Pension Cuts Spark Anger

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When Puerto Rico Governor Wanda Vazquez announced late last month that she was acceding to requests from the commonwealth’s Congressionally mandated fiscal oversight board to slash some government-worker pensions by as much as 8.5%, the reaction was swift.

Protesters returned to the front of the governor’s mansion in San Juan’s colonial quarter - the site of protests that eventually ousted former governor Ricardo Rossello this past summer - and even at what they believed to be the private homes of board members, chanting and banging on pots and pans in what is known as a cacerolazo (the name coming from the Spanish word for a pot used to cook stew, cacerola).

Adding her voice to the street protests, Maite Oronoz Rodríguez, the head of Puerto Rico’s Supreme Court, sent a letter to the board warning of mass resignations in the island’s judiciary because of pension concerns, stating that “after a lifetime of dedication and service to Puerto Rico, our judges do not deserve to be speculating about their future based on the limited information” she said the board had made public about its plans.

Despite her televised statement that she did “not support any reduction in benefits to retirees,” Vazquez nevertheless said she wanted the board to finish its work “as soon as possible” and said that the cuts now would avoid the need for larger pension cuts of up to 25% in the future.

While Vazquez’s administration opposes cutting pensions, it won’t obstruct the progress of the federal board’s debt adjustment plan, Eli Diaz Atienza, the governor’s non-voting board representative, said during a public meeting of the board last month. Still, the administration will seek to alleviate future pension cuts through the commonwealth’s budget, Diaz Atienza said.

“Central to the government’s consideration of the plan, however, is the government’s stated commitment to the priority of pension payments and in practice to take steps where necessary and appropriate to restore and mitigate the impact of any future pension reductions through the exercise of government policy measures in the commonwealth’s budget or through additional sources of revenue,” Diaz Atienza said during the meeting.

Related: Puerto Rico Board Unveils Proposal to Slash Debt, Pensions

The board, for its part, trumpeted the plan, saying in a statement that it delivered “meaningful reductions from bondholders, providing, on average, a more than 60% blended reduction in total commonwealth liabilities and “strengthens pensions by establishing an independent pension reserve trust to ensure” that benefits could be paid “regardless of the economic or political situation” on the island.

The plan includes an 8.5% pension cut to retirees who earn more than $1,200 a month, which would affect an estimated 40% of retirees. The tentative agreement with retirees does provide for additional payments if Puerto Rico’s finances improve. If the commonwealth’s surplus is higher than projected during the next 15 years, retirees will receive 10% of that additional cash to make up for any cuts in the pension benefits, according to details of the plan posted on the federal board’s website.

“We think it’s an incredibly unfair process that has led up to this point negotiating the retirement system,” said Armando Santiago Pintado, the coordinator with the Let’s Build Another Agreement organization, which describes itself as a mobilization campaign to defend the island’s essential services and includes retired teachers, government workers and university professors.

“This move is a systemic risk for Puerto Rico,” Santiago said.

Referring to the Puerto Rican government’s plan of adjustment, which critics have charged is too generous to bondholders, Santiago said it would deplete urgently needed resources and that “we’re going to be right back into bankruptcy in the near term.”

In 2016, the U.S. Congress passed a law called Promesa that gave Puerto Rico the ability to seek bankruptcy and created the federal oversight board to manage the island’s finances. Though the board has the power to make binding policy choices over the objections of the island’s elected government, a federal judge concluded it has only budgetary tools and negotiations to force compliance from elected officials and legislators in terms of adopting new laws or modifying or repealing existing ones.

To contact the reporter on this story: Michael Deibert in San Juan at mdeibert@bloomberg.net

To contact the editors responsible for this story: Matthew Bristow at mbristow5@bloomberg.net, Michael B. Marois, Elizabeth Campbell

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