Puerto Rico has until April 5 to submit a revised fiscal plan that includes 10% pension cuts and other reforms, the federal Financial Oversight and Management Board said Wednesday in a letter to Gov. Ricardo Rossello, who later withdrew his proposal after the board demanded further labor reforms.
"The oversight board pretends to dictate the (government's) public policy. This is not only illegal but is unacceptable. Because of this, I rescind the proposed labor reform, which includes a cut of vacation days, sick leave and the elimination of the Christmas bonus," the governor tweeted Wednesday evening.
Oversight board documents released Wednesday call for freezing pension benefit accruals by July 1, 2019, and enrolling all employees in defined contribution plans. Accrued benefits would be reduced progressively to an average cut of 10%, with no cuts for participants whose combined pension and Social Security benefits are below the poverty level of $1,000 per month. Police, teachers, and judges under 40 would be enrolled in Social Security, with their payroll taxes offsetting the mandatory pension contributions.
Puerto Rico's government employees and judiciary retirement system has no assets and is paying benefits out of commonwealth revenues and asset sales.
For the Puerto Rico Electric Power Authority, which is the subject of bondholder lawsuits, the board in a separate letter called for the pension savings measures to be reflected in the financial projections. It also called on PREPA to provide within 30 days an estimate of the underfunded pension liability under various rate of return scenarios, in collaboration with the board's actuarial consultant.
"Given that a current estimate is not available at this time, the financial projections in the latest fiscal plan should not assume payment of outstanding pension obligations to address underfunding," the board said in the PREPA letter.
In February, the oversight board appointed Citigroup Global Markets as the lead investment banking advisers for restructuring and privatizing PREPA, including restructuring the debt held by investors.
Before the governor withdrew his labor reform proposal, the oversight board said it was on track to certify fiscal plans for the commonwealth, PREPA and other agencies on or before April 20. In the board's letter to the governor, Chairman Jose Carrión said that Puerto Rico's problems "are serious, yet addressable."
"Years of negative growth and fiscal irresponsibility long before Hurricane Maria produced a debt crisis with over $70 billion in outstanding obligations. Hurricane Maria then devastated core infrastructure and impacted the lives of millions of Puerto Ricans. We have the chance now, with the support of the federal government and the stimulus effect of federal funding, to launch a truly sustainable recovery," he said. Without taking those steps, he said, "we face continued contractual obligations that exceed our means."