Fiscal board sues to halt implementation of retirement law
By The Star Staff
The Financial Oversight and Management Board has filed a lawsuit to stop the implementation of the Dignified Retirement Act, which prevents cuts to pensions.
The suit was filed last week in the Title III bankruptcy process against Gov. Pedro Pierluisi Urrutia, the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF by its Spanish initials), Senate President José Luis Dalmau Santiago and House Speaker Rafael Hernández Montañez to enjoin the enforcement and to nullify Act 7-2021.
Pierluisi signed Act 7 into law on June 9, but certified, through AAFAF, that the Act is “significantly inconsistent” with the commonwealth’s 2021 certified Fiscal Plan. The governor’s certification further conceded that enforcement of the Act could violate various other provisions of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), including the autonomy of the oversight board (section 108(a)), implementing a reprogramming of government funds without oversight board approval (section 204(c)), and modifying billions of dollars of debt without oversight board approval (section 207), the board said.
Act 7 must be nullified because it prohibits the island government from cooperating with any plan of adjustment at odds with the provisions of Act 7, including the Fourth Amended Plan of Adjustment filed on June 29, the oversight board said in the lawsuit. The governor’s refusal to confirm that he will not implement the Act, and the Legislature’s refusal to repeal any portion of the Act, leave the oversight board with no choice but to pursue litigation, the board said.
“Act 7 falsely promises retired government employees a ‘dignified retirement’ through increased benefits Puerto Rico cannot afford,” said David Skeel, the oversight board’s chairman. “Act 7 results in the opposite of ‘dignified retirement’; it would endanger retirement benefits in the future because the law cannot and will not adequately fund the promises it makes. Puerto Rico remains in a fiscal crisis and the implementation of Act 7 would derail the progress made in reaching consensual debt restructuring, prolong bankruptcy, result in fiscal instability, and delay the recovery.”
Act 7 establishes a new pension trust that will likely be insolvent no later than 2053, and potentially much sooner, the fiscal board said. The law also reverses previous governments’ pension policies designed to promote fiscal sustainability and access to capital markets, returning to the fiscal mismanagement that resulted in unsustainable levels of debt and Puerto Rico’s bankruptcy, the lawsuit says. Act 7 would reinstate the failed defined-benefit plans of the past, and effectively eliminate the current PayGo system and defined contribution accounts implemented by Act 106-2017, the board said.
Moreover, the new law would increase commonwealth pension liabilities by an estimated $17 billion
through fiscal year 2049 but proposes to pay for it by diverting funds designated for debt service
without demonstrating that these funds will be sufficient to satisfy these obligations, the oversight board said in the lawsuit. Therefore, the board said, it is inconsistent with PROMESA’s mandate for Puerto Rico to achieve fiscal responsibility.
Act 7 also attempts to dictate the terms of a debt restructuring plan that would override the oversight board’s proposed consensual agreement to lower Puerto Rico’s debt from $35 billion to $7 billion and save Puerto Rico almost $60 billion in debt service payments by prohibiting the government from using resources to help achieve and enable any plan of adjustment differing from the act’s requirements, the board said.
“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,” said the oversight board’s executive director, Natalie Jaresko. “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.”
Finally, the board said, the law is inconsistent with PROMESA’s mandate giving the oversight board the exclusive authority to propose or modify a plan of adjustment.