Puerto Rico's oversight board filed an adjustment plan Friday that calls for reducing bondholder and other debt by 60% and cutting some public pension benefits by 8.5%, among other steps.
Members of the Financial Oversight and Management Board for Puerto Rico said at a public meeting that the proposed plan of adjustment will allow Puerto Rico to reduce $35 billion in debt to $12 billion as it works to exit bankruptcy. Combined with the debt restructuring agreement reached earlier this year with Puerto Rico's Sales Tax Financing Corp., known as COFINA, annual debt service is projected to drop to less than 9% of revenues, down from the nearly 30% level that Puerto Rico amassed before the oversight board and bankruptcy process were created.
Between pension debt and the $70 billion in debt amassed by other government and public corporations, the Puerto Rican government was spending nearly $3 out of every $10 in tax revenue to service its debt.
Board Chairman Jose B. Carrion III said the plan, filed with the U.S. District Court for the District of Puerto Rico in San Juan overseeing multiple bankruptcy cases, represents "a big step to put bankruptcy behind us and start (to) envision what Puerto Rico's future looks like under fiscal stability and economic sustainability." But, Mr. Carrion added, "We are not there yet. We need court approval, and it will take time to get there."
By 2016, when the oversight board began, Puerto Rico had more than $50 billion in unfunded pension benefits and no assets. By fiscal year 2018, it was able to make payments only as revenue came in. Andrew G. Biggs, an oversight board member and resident scholar at the American Enterprise Institute, said at the meeting that several factors, including increased benefits, inadequate employer contributions and payment enforcement mechanisms, and the use of pension plan assets to fund other benefits "all contributed to the pension system's insolvency."
The plan's 8.5% pension benefit cut for retirees applies only to retirees receiving more than $1,200 a month, with 60% of retirees not facing any cut. The plan also creates an independent pension reserve trust to ensure that current "pay as you go" pension benefit payments — benefits paid to retirees as they come due instead of prefunding benefits — are made regardless of economic or political changes.
Natalie Jaresko, oversight board executive director, said the adjustment plan has support from three "critical" groups: the Official Committee of Retired Employees of the Government of Puerto Rico; the Lawful Constitutional Debt Coalition and the QTCB Noteholder Group, which represent certain general obligation bondholders; and the Public Servants United of Puerto Rico affiliate of AFSCME Council 95. The plan does not have the support of Puerto Rican teachers.
Board members said they expect resistance from other bondholders and creditors, but Ms. Jaresko said the board will continue to seek support from other stakeholders. "We wish this plan to be one and done," she said.
Details of the adjustment plan are available on the oversight board's website.