The federal board overseeing Puerto Rico's debt restructuring is suing its governor and other elected officials to stop a new law it said would derail a proposed restructuring agreement over pensions and other financial obligations.
The Financial Oversight and Management Board for Puerto Rico said July 2 that it filed the lawsuit seeking to stop the new law, known as Act 7, because it would create billions in new pension obligations and reallocate all debt service dollars to a new pension trust.
The oversight board said in a statement that Act 7 would also override a proposed consensual agreement to lower Puerto Rico's debt to $7 billion from $35 billion and save nearly $60 billion in debt service payments,
"For four years, the Oversight Board, the Puerto Rico government, retirees, and creditors have been negotiating to reach a consensual agreement that would allow Puerto Rico to emerge from bankruptcy," Executive Director Natalie Jaresko said in the statement.
"This law would derail that progress and result potentially in years of deadlock and litigation. Act 7 is not in anyone's interest, neither retired government workers nor hard working Puerto Ricans."
Puerto Rico Gov. Pedro Pierluisi has supported debt restructuring, while also questioning the need for pension benefit cuts that are part of the plan coordinated by oversight board.
Oversight board officials said that they do not want to cut pensions, but public retirees are considered unsecured creditors under law and their treatment under the adjustment plan must be approved by a court. The restructuring plan ensures that more than 70% of retirees would not experience pension cuts and it protects future pension funding by establishing a pension reserve trust.
The new Puerto Rico law enacted June 9 "falsely promises retired government employees a 'dignified retirement' through increased benefits Puerto Rico cannot afford," Oversight Board Chairman David Skeel said in the statement. "It would endanger retirement benefits in the future because the law cannot and will not adequately fund the promises it makes."
It would reinstate "the failed defined benefit plans of the past and effectively eliminate the current pay-go system and new defined contribution accounts, it would increase pension liabilities by an estimated $17 billion through fiscal year 2049," he said.
The next hearing on the restructuring plan is scheduled for July 13.