By The Star Staff
The debt adjustment plan approved this week by Title III
Bankruptcy Judge Laura Taylor Swain will tie the hands of the island’s governor and lawmakers as they will be forbidden from enacting legislation that alters or hinders the terms of the agreement.
For instance, the government and lawmakers must wait at least 10 years to enact new legislation to create or increase any defined benefit pension payment or obligation to current or future retirees from or related to any defined benefit plans over the benefits provided by the debt adjustment plan (PAD by its Spanish acronym), regardless of funding source, or undo in whole or part the PAD’s eliminations of defined benefit plan accruals and cost of living adjustments for government employees. After the Financial Oversight and Management Board for Puerto Rico leaves, the government may go to court to seek a relief from that provision.
While the plan does not cut the pensions of retirees, teachers and judges will be moved after March to a defined benefit plan and will be enrolled in Social Security, said Natalie Jaresko, the oversight board’s executive director.
The PAD, which is expected to go into effect by March 15, would reduce the commonwealth’s outstanding debt by almost 80%, from $33 billion to $7.4 billion. Along with a bond exchange, investors will receive a $7 billion upfront cash payment and will have a guarantee called a contingent value instrument (CVI) that pays if sales tax revenue surpasses projection. The deal also establishes a reserve fund for pensions, which have some $55 billion in unfunded liabilities.
Upon termination of the oversight board’s rule over Puerto Rico, the governor will be in charge of enforcing the PAD. If the governor fails to enforce a PAD provision directly or indirectly impacting a party in interest after being requested to do so by a party in interest, each party in interest that would reasonably be prejudiced or injured by lack of enforcement may enforce the PAD provision.
“At no time prior or subsequent to the termination of the Oversight Board shall the Governor or Legislature enact, implement, or enforce any statute, resolution, policy, or rule reasonably likely, directly or indirectly, to impair the carrying out of the Plan’s payment provisions, covenants, and other obligations,” the PAD states.
The governor is required to cause the executive branch of the commonwealth government to take all actions necessary for the consummation of the PAD. Legislation authorizing plan debt can not be repealed or changed.
The Puerto Rico government will be barred from enacting any statute, resolution, policy, or rule that would repeal or change any law currently existing that authorizes debt issued pursuant to the PAD or any law pledging the full faith, credit, and taxing power of the commonwealth to secure debt issued pursuant to the PAD.
The government cannot take action to limit a CVI, such as those impacting rum revenues.
In anticipation of Judge Swain’s ruling confirming the plan, the value of Puerto Rico bonds went up.
Bloomberg reported that a Puerto Rico general obligation (GO) with an 8% coupon and maturing in 2035 traded Tuesday, the day of the confirmation, at an average price of 90.3 cents on the dollar, up from 87.5 cents at the start of the year. Puerto Rico will pay an average of $1.5 billion in debt service annually, including $666 million in new GO bonds.