Puerto Rico's Pensions: $2 Billion in Assets, $45 Billion in Liabilities
25 August 2016 - 9:50PM
Dow Jones News
By Nick Timiraos
San Juan, Puerto Rico -- One of the thorniest tasks awaiting a
seven-member board charged by Washington with cleaning up Puerto
Rico's debt crisis is deciding how to balance a $70 billion debt
load with nearly $43 billion in unfunded pension liabilities.
The issue is coming to a head now because the White House is set
to name as soon as next week the members of that oversight board,
drawn from lists of candidates submitted by congressional leaders
in both parties.
Puerto Rico's constitution calls for the island to pay its
general-obligation bonds ahead of public services or pensions, but
a law signed by President Barack Obama in June clouds that
hierarchy by directing the new board to ensure pensions are
adequately funded.
For the oversight board, "there are no good options here," said
Matt Fabian, a partner at research firm Municipal Market Analytics.
Cutting payouts to debtholders ahead of pensions will inflame
creditors, but cutting pension payments to plan members could
accelerate the migration and economic decline that the oversight
board is tasked with stemming.
Creditors fired a pre-emptive volley last month when they sued
the island's government in federal court after it passed a budget
that increases funding for pensions without setting aside money for
debt payment. The budget diverts "vast resources to purposes that
apparently enjoy political favor but are indisputably junior to
constitutional debt, " the complaint said.
The lawsuit was brought by hedge-fund firms that include
Aurelius Capital Management, Monarch Alternative Capital and Stone
Lion Capital Partners.
Puerto Rico missed more than $900 million in payments on $2
billion in debts due July 1, including its first-ever default on
general-obligation debt.
Bond investors fear that favorable treatment for pensioners in
Puerto Rico will reinforce earlier precedents set in distressed
municipal workouts in cities such as Detroit and Stockton, Calif.
"Pensioners will see a better recovery than all or most
bondholders," said Mr. Fabian. "They just can't swallow haircuts
like bondholders can."
Puerto Rico's three public pensions have about $2 billion in
assets against $45 billion in liabilities, a shortfall far worse
than any U.S. state pension system. The pensions are on track to
exhaust their assets by 2019. The government would have to spend
$700 million annually, or about 8% of revenue, to maintain current
benefit payments.
The problems facing Puerto Rico are an extreme version of one
states face in the coming decades. Governments have funded an array
of promises to public employees with debt that is growing faster
than the population as a whole. The challenges are particularly
dire in Puerto Rico because teachers and police officers don't
participate in Social Security, leaving them with no fallback if
pensions are reduced.
Obama administration officials have already signaled that debt
restructuring needs to prevent further collateral damage to Puerto
Rico's economy. "If people leave the island because they're not
willing to work and pay into a system that isn't going to pay any
benefits, how is that going to help the bondholders?" said Treasury
Secretary Jacob Lew on a May visit to the island.
For years, Puerto Rico borrowed more -- and incurred higher
fixed costs -- to buy time to stave off deeper economic overhauls.
With government payrolls down over the last decade, pension funds
have fewer workers contributing. Shortly after taking office in
2013, Puerto Rico Gov. Alejandro García Padilla signed an overhaul
of the territory's public pension fund, raising retirement ages,
reducing some benefits and boosting worker contributions.
Until that overhaul took effect, Irba Batista, 55 years old,
would have been eligible to retire this year and take a pension
worth 65% of her salary. The changes will leave her with a smaller
payout after she turns 62. Her husband, whom she must care for
because he is blind, collects a $1,500 monthly government
pension.
Some of the pension funds' assets aren't liquid because they
have been lent to plan members. The funds have extended around $1
billion in mortgages and personal loans, including loans of up to
$5,000 for "cultural travel."
Ms. Batista, who works for the public sports and recreation
agency, said she borrowed from the pension fund to pay off bills,
including surgery for her husband, and to fix up their home in
Carolina, east of San Juan. She doubts that her son, who is
studying in Texas, will return after he graduates. "There's no
employment here," she says.
Some creditors and municipal-credit analysts say Puerto Rico's
crisis has been made worse by government overspending and promises
to unions for employee benefits that officials knew they wouldn't
have the resources to properly fund.
Sen. Orrin Hatch (R., Utah), who voted for the Puerto Rico bill
in June, chided the Obama administration at the time for pushing
for the "most comprehensive debt resolution authority possible in
an obvious attempt to favor public pensions in Puerto Rico."
Union leaders fear the oversight board will further erode their
power. Already, most negotiations in recent years have been
"'give-back-or-give-up' negotiations," said Iram Ramírez, a senior
labor leader in San Juan.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
August 25, 2016 16:35 ET (20:35 GMT)
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