Oversight board warns gov’t against enacting Dignified Retirement bill
By The Star Staff
The federal Financial Oversight and Management Board for Puerto Rico threatened to take the island government to court if it enacts into law House Bill (HB) 120, the Dignified Retirement Act, a bill that would prevent any cuts to pensions.
“The Oversight Board believes the passage and enactment of HB 120 would only lead to its nullification by the Title III court and subsequent administrative headaches to unwind the law,” states a letter dated Feb. 20 from Natalie Jaresko, the executive director of the oversight board, to Gov. Pedro Pierluisi Urrutia.
Jaresko said HB 120 purports to dictate the terms of a plan of adjustment (POA) for the commonwealth that the government would be willing to accept as a condition to cooperating to restructure the island’s enormous debt. The oversight board is proposing an 8.5% cut to pensions higher than $1,500 as part of a new debt adjustment plan, which is slated to be made public March 8.
The bill would eliminate all pension reforms contemplated by the Fiscal Plan (including the freeze of benefit accruals under the Teachers Retirement System and Judicial Retirement System and moderate cuts to benefits), along with essential reforms implemented under Act 106-2017, which created the current Pay as You Go system in which retirees are paid from the government’s General Fund.
The letter states that notwithstanding that the oversight board rendered governmental retirees the most favored classes of claimants under each of its proposed POAs while financial creditors suffer substantial discounts, HB 120 attempts to impose further huge obligations in favor of retirees while effectively defying the Title III court’s ruling nullifying Law 29.
Jaresko noted that the commonwealth Fiscal Agency and Financial Advisory Authority (AAFAF by its Spanish initials) has refused to support the legislation.
“To date, the Legislature has ignored the concerns of the Oversight Board and AAFAF and continues its march toward enacting this Bill that, if implemented, would be disastrous for the Commonwealth’s employees and gravely impair the financial recovery and future of Puerto Rico,” she said.
Among the reasons for opposing the bill, the oversight board said HB 120 violates the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) because it would modify billions of dollars of debt to retirees.
HB 120 rests on false economic assumptions, the letter states, because it assumes the commonwealth can afford to pay 100% of the pre-petition debt service and simply redirect a substantial portion of those debt service payments to fund pensions.
HB 120 contemplates an insufficiently funded pension trust (FACSiR), which will not and cannot cover HB 120’s increased benefit payments, the letter says.
“In this respect alone, HB 120 violates PROMESA section 201(b)(1)(c), which requires a certified fiscal plan to ‘provide adequate funding for public pension services,’” Jaresko said in the letter. Indeed, based on the oversight board’s analysis, FACSiR’s balance will never cover more than 20% of the commonwealth’s pension obligation under the bill, and would be completely depleted by 2053, the letter states.
“Equally troublingly, HB 120 fails to specify what would happen when FACSiR runs out of money,” she said. “HB 120 purports to eliminate the PayGo system, terminate the Act 106 defined contribution plan, and create a pension trust that would, in effect, reinstate the failed defined benefit plans of the past with retirement benefits that will not be subject to adjustment in the Commonwealth’s Title III case.”
Jaresko also said HB 120 contemplates using contributions from current employees to fund the government’s obligations to current retirees.
“This policy eschews segregated and individually controlled accounts in favor of a pension trust that will be woefully underfunded and, like its predecessor ERS, become completely unfunded when today’s employees eventually retire,” she said.
It also makes false promises to participants, she added.
On Feb. 12, the oversight board reviewed a detailed analysis of HB 120 and determined that its enactment would impair and defeat the purposes of PROMESA.
“Based on the Oversight Board’s determination that HB 120 impairs and defeats the purposes of PROMESA, PROMESA section 108(a)(2) enjoins the Legislature and Governor from enacting, implementing, or enforcing HB 120 or any law based on HB 120,” Jaresko wrote.
If the island Legislature passes HB 120 and/or the government attempts to enact or implement it, despite PROMESA’s injunction set forth in the preceding paragraph, the oversight board “can file suit against the government for all appropriate remedies and sanctions arising out of such intentional violations of PROMESA, including under its sections108(a)(2), 204(a), 204(c), and 207,” the letter states.