Puerto Rico Oversight Board Sues to Stop New Pension Benefits
(Bloomberg) -- The Financial Oversight and Management Board for Puerto Rico said it filed a lawsuit to stop the local government from offering public workers billions in new retirement benefits that it says will undermine the island’s long-sought plan to restructure its debt.
In a statement issued late Monday, the board said it had filed the suit in Puerto Rico District Court to stop the pension measures -- known as Act 80, Act 81, and Act 82 -- because they are being pushed forward without sufficient analysis about how to pay for their costs.
The board estimates the three laws could increase government expenses by as much as $8.3 billion over the next 30 years. Even partially implementing Act 80, which promotes early retirement, could cost the government an additional $61 million in the first year alone, the board said.
The lawsuit comes as Puerto Rico nears the end of a four-year bankruptcy process. The island, along with the oversight board and other interested parties, have negotiated a plan that would reduce public debt by $33 billion.
While public workers would not see their benefits cut, the board is seeking to eliminate cost-of-living increases and freeze the pensions of teachers and judges to switch them to a defined-contribution plan, similar to a 401(k). The new laws would freight the island’s pension system with new expenses.
On Tuesday, Puerto Rico general obligation bonds with a 5% coupon and maturing in 2035 traded at an average of 100.87 cents on the dollar, a 3.3% yield on a yield-to-worst basis, according to data compiled by Bloomberg. That compares with an average price of 100.581 cents on the dollar last week with a 3.7% yield on a similar basis. The securities can next be called at par in July 2022.
The federally appointed oversight board said it had been negotiating with Governor Pedro Pierluisi for more than a year to explore ways to make the new obligations affordable, but no agreement had been reached. Pierluisi has repeatedly clashed with the board over attempts to modify public pensions.
“The Oversight Board would have preferred to work with the government to find a viable alternative that would provide teachers, police officers, and other government employees with a real plan that Puerto Rico can afford rather than falling back into the old ways of making promises that cannot be fulfilled,” Oversight Board Chairman David Skeel said in a statement.
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Last week, U.S. District Court Judge Laura Swain, who is overseeing the island’s record-setting bankruptcy proceedings, threatened to reject the debt plan if the board didn’t provide more details to justify overriding local laws, including the three pension measures.
“The government and the Oversight Board both hope the court will confirm the plan,” Skeel said. “The last thing Puerto Rico needs is more fiscal mismanagement, just as it is on the verge of getting out of bankruptcy and returning to prosperity.”
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