Prep for commonwealth DAP implementation included $11 billion transfer to Treasury
By The Star Staff
In preparation for the implementation of the commonwealth debt adjustment plan by Tuesday, the Financial Oversight and Management Board and the island government had to perform more than 170 tasks, including the transfer of over $11 billion to the Treasury Department’s single account.
The information is contained in court documents filed as part of the Title III bankruptcy that culminated on Jan. 18, when the court confirmed the Modified Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, the Employees Retirement System, and the Puerto Rico Public Buildings Authority. The plan reduces $33 billion in bond debt to about $7 billion and cuts overall debt by 80%, according to the oversight board. The case has accumulated over $1 billion in legal fees.
The plan is going into effect Tuesday after the U.S. First Circuit Court of Appeals refused to block Puerto Rico from implementing the debt-cutting plan as requested by a teachers’ union group. As reported by the STAR, the Bank of New York Mellon refuses to make certain payments required by the plan unless its legal expenses and other fees are paid.
The plan entails the transfer of over $11 billion from multiple instrumentalities to the Treasury Single Account. Other tasks include, among other things, the drafting of multiple sets of bond and trust documentation, the certification of revised budget resolutions, the amendment of more than a dozen collective bargaining agreements, and the hiring of multiple advisers and trustees to assist with the execution of payment transfers and other required tasks.
“These tasks also include extensive preparation for the implementation of the modified employee benefit provisions enumerated in the Plan. As an example, the Government must recode its payroll system to modify employee withholdings for the pension freeze, increased participation in Social Security, and adjusted Act 106 plan contributions pursuant to the Plan,” a recent court document said. “Many of the implementation tasks must be completed several weeks before the Effective Date, so that the Effective Date requirements can be achieved.”
In late February, the oversight board approved a budget amendment that included more than $9 billion for bond payments after efforts by legislators failed to pass the debt payments required by the court-approved plan of adjustment. The payments were part of a $23.5 billion General Fund budget for the current fiscal year.
A key component of the plan of adjustment is the treatment of current and former employee-related claims. The oversight board said it has worked in close coordination with the Puerto Rico Fiscal Agency and Financial Advisory Authority and various government agencies to prepare for the implementation of measures on and after the March 15 effective date regarding the transition to new retirement and employment benefits, including, without limitation, procedures associated with continuation of employee benefits.
The plan calls for a Pension Reserve Trust in the amount of the Base Contribution (a known amount based on the Projected Fiscal Plan Surplus in the Fiscal Plan certified on Jan. 27), plus an additional amount that is to be calculated based on actual commonwealth surpluses in each of the 10 years of the Pension Reserve Trust funding.
Additionally, the confirmation order provides that the Pension Reserve Trust’s initial funding amount, $5 million dedicated for administrative and “start-up” costs, is to be deposited to the Pension Reserve Trust on the effective date. The amounts will be allocated in installments.
Employees in bargaining units represented by the American Federation of State, County and Municipal Employees, commonly known as AFSCME, or its local affiliates and all other eligible commonwealth employees designated by the oversight board will participate in the Upside Participation Bonus for the five years following the March 15 effective date.
Meanwhile, the plan provides for changes in the pension system. For instance, the freeze in the Teachers Retirement System (TRS) will occur on March 15. After the freeze date, active TRS participants will not have the right to accrue additional pension benefits or age into retirement eligibility under the terms of the TRS plan; the retirement age will increase to 63 for those not eligible at the freeze date, and such participants will no longer have the right to purchase service credit toward retirement with either cash payments or application of unused vacation days. Additionally, the oversight board agrees that retirement eligibility (including eligibility to achieve 30 years’ service to obtain the enhanced merit pension) for active TRS participants who applied for retirement at the end of the current school year by the Jan. 31 deadline may be determined based on the person’s age and service at the time of retirement, so long as retirement occurs at the end of the current semester. However, the calculation of benefits will be based on time of service before freeze day.