PR’s debt adjustment plan confirmed after 5 years of bankruptcy
By The Star Staff
After five years of bankruptcy, Title III Bankruptcy Judge Laura Taylor Swain entered an order Tuesday confirming the debt adjustment plan that will reduce some $33 billion in central government debt to about $7 billion as well as restructure some $50 billion in unfunded pension debt.
Swain said all objections are overruled except those related to eminent domain claims. The Financial Oversight and Management Board for Puerto Rico said the plan prevents the Legislature from enacting laws “to borrow too much” and increase debt.
“With the narrow exception of the objections of holders of alleged Eminent Domain/Inverse Condemnation Claims, which are hereby sustained to the extent that such Claims are ultimately allowed claims, all objections, responses to, and statements and comments, if any, in opposition to or inconsistent with the Plan shall be and hereby are, OVERRULED and DENIED in their entirety,” the judge ordered. “All withdrawn objections are deemed withdrawn with prejudice.”
The overruled objections, and the oversight board’s positions as to the proper scope of preemption and the proper treatment of Eminent Domain/Inverse Condemnation Claims, were preserved for appeal.
Swain held confirmation hearings in November and ordered amendments to the debt adjustment plan, which goes into effect in March, before Tuesday’s order. The oversight board said the event marks a new chapter in Puerto Rico’s history. The plan of adjustment reduces the debt by 80% and saves the island $50 billion in debt service payments, the board said.
“The bargaining over this plan was months and months, years, very far thought. … We were able to bridge differences of opinions. … This bankruptcy process is unprecedented. There has not been a bankruptcy like this,” oversight board chairman David Skeel said. “As complicated as Detroit was, Puerto Rico was more complicated.”
The judge also dismissed objections by pro se claimants Peter Hein and Arthur Samodovitz asserting that the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), violates the Bankruptcy Clause of the United States Constitution because it is not uniform with Chapter 9, which requires, as a predicate to filing a petition, a showing of insolvency.
“PROMESA does not violate the uniformity requirement of the Bankruptcy Clause of the Constitution of the United States,” she said.
The judge allowed that separate classification of Claims for retirement benefits from the claims of other creditors is justified.
“Unlike the Claims of commercial creditors, who contracted to be paid a fixed sum at a fixed time, retirees agreed to defer their compensation with the expectation that the deferred compensation, i.e., their pension, would be paid in periodic payments over the balance of their life (and that of any surviving spouse), based on formulas established when they worked for the Commonwealth or other governmental entities,” the court document said. “Accordingly, the Plan proposes to make payments to retirees over the life of the retiree and any eligible spouse through the PayGo system and specified statutory rules established before the Commonwealth’s Title III case began, as modified pursuant to the Plan, including through the “freeze” of Teachers Retirement System and Judicial Retirement System and elimination of cost of living adjustments.”
The judge ruled that pensions will not be cut but eliminated certain benefits for teachers and employees of the courts.
Cutting pensions actually could destabilize Puerto Rico’s economic prospects, lead to greater outmigration, and make it harder for Puerto Rico to obtain credit in the future, and economists have said the savings from pension cuts do not justify the damage those cuts would cause to the economy. Roughly half of the retirees have pensions that place them below the federal poverty level of $11,880 per year for a single-person household. Further, retirees have also already experienced substantial reductions in pensions, and, except for judges, government retirees have not received cost of living increases since 2008.
Swain said that certain preempted statutes require the commonwealth to provide pension and other benefits or payments to retirees who participated in the government, teachers and judiciary retirement systems at statutorily specified rates that would amount to some $984 million.
“Such statutes are inconsistent with PROMESA to the extent they are inconsistent with the discharge of claims and treatment provided for pension benefits and payments by the Plan under Title III of PROMESA and would undermine the restructuring contemplated by the Plan and the Plan’s contemplated repayment of claims from such revenues,” the judge said said.
Natalie Jaresko, the oversight board’s executive director, said the “event was emotional for us.”
The plan leaves some $20 billion in working cash as well as $1 billion in emergency reserve funds. The government can only refinance debt to pay for it and not to operate, Jaresko said.
The oversight board said that now the government can become more efficient.