Puerto Rico’s retirement plan woes persist as bankruptcy comes to an end

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The long history of non-payment of its Puerto Rican pension obligations is expected to haunt the United States even after its bankruptcy ends.

A bankruptcy restructuring plan under consideration by a federal judge would end defined benefit pension programs covering tens of thousands of active teachers and judges in Puerto Rico. The retirement benefits that public employees have already earned would be honored when they retire, although current workers cannot accumulate anything more.

These measures would help close an estimated $ 55 billion gap between the retirement benefits owed to Puerto Rican officials and the funding set aside to pay them. Active teachers and judges are moved under the bankruptcy plan to defined contribution pension products similar to 401 (k), ending defined benefit formulas in place at the start of many of their careers. The retirement age would be raised, delaying the time when pensions can be used.

Fixing Puerto Rico’s pension system will continue to strain both its employees and its shrinking taxpayer base. The bankruptcy plan pays in full the defined benefits accrued over the past decades, when politicians routinely handed out pension enhancements and other retirement benefits without the proper funding.

Teachers who were close to retirement, these teachers will now have to work more years to retire with less money.


– Luis Colón Santos, professor in San Juan, Puerto Rico

Luis Colón Santos has been a teacher in Puerto Rico for almost 16 years. When he started, the monthly salary for the 40-year-old San Juan resident was $ 1,650. He has since obtained four teaching licenses and is completing his doctorate in education. He now earns $ 2,010 per month.

He said he was previously expected to receive $ 1,400 in monthly retirement benefits when he planned to retire at age 55. Now, if the bankruptcy plan is approved, he has said he has to wait until he retires at 63 and will not receive more than $ 600.

“The teachers who were about to retire, these teachers are now going to have to work more years to retire with less money,” he said.

Municipal bankruptcies are rare, but cities, counties, and other small public entities in the United States have sometimes used bankruptcy protection to reduce pension liabilities, bond debt, and other financial obligations. About half of states allow their cities to file for bankruptcy, which can put retirees against bondholders in competition for overexploited resources. Elected officials may be pressured to honor pensions, including benefits already promised.

“It is fairly widely accepted that pension benefits can be reduced in the event of legal bankruptcy. But in these big municipal bankruptcy cases, I think what we’ve really seen is political pressure not to do it, ”said Amy Monahan, a University of Minnesota law school professor who studied legal issues related to public pensions.

Puerto Rico’s bondholders agreed to write-downs that reduced expected debt payments to $ 34.1 billion by $ 90.4 billion under its bankruptcy plan, which analysts plan to approve in the next weeks. The supervisory board that guided the territory through its financial crisis has insisted for years that annual pensions above $ 18,000 also be reduced. A majority of public retirees in Puerto Rico receive monthly benefits of less than $ 12,000 per year, according to court documents filed by an official committee of retirees.

Gov. Pedro Pierluisi and legislative leaders refused last year to allow a deal with bondholders unless accumulated pensions are intact, a concession the supervisory board agreed to in October as restructuring was gaining momentum.

“People have done the service before, and it’s part of the contract with them,” said Jeannine Markoe Raymond of the National Association of State Retirement Administrators. “The benefit is always due whether or not the government has set aside money to pre-finance it.”

Teachers and supporters marched in San Juan, Puerto Rico, in March 2017 to protest cuts to public retirement programs.


Photo:

thais llorca / European Press Photo Agency

Active teachers and judges will still have their pension accruals frozen under the bankruptcy scheme, assuming it gets court approval. Puerto Rican teachers ‘unions and judges’ associations voted against the restructuring and opposed its approval in the courts, opposing the mid-career change in pension formulas.

Natalie Jaresko, executive director of the supervisory board, said retirees are not to blame for Puerto Rico’s budget crisis after previous governments underfunded pensions for decades. But without the benefit freeze, Puerto Rico faces billions of dollars in unpredictable additional costs that would make the restructuring plan unworkable, she said.

As early as the 1950s, elected officials added a range of benefits to retirement packages such as Christmas and summer bonuses, medical contributions, post-hoc cost-of-living increases, early retirement and loans. staff for mortgages and cultural excursions. Employer contributions, which were set by law, were consistently below what was needed to keep pension systems healthy while politicians spent on other priorities.

“These are programs that affect people over an incredibly long period of time, and yet they are governed by people whose timelines extend from today to the next election,” said Andrew Biggs, member of the Supervisory Board and principal investigator at the American Enterprise Institute. , a conservative think tank.

Reforms that began in 1990 cut pension plans for newly hired workers. But those changes failed to address the unfunded liabilities arising from older participants, many of whom could retire at age 55 with 30 years of service and lifetime payments of 75% of their highest annual salaries. Pension benefits were cut again as part of a 2013 pension overhaul that was partially overturned by the courts.

With pension trust funds now depleted, pension benefits are an item in Puerto Rico’s budget that is expected to cost around $ 2.3 billion in the current fiscal year. Once the bankruptcy is over, early retirement programs and other compensation and benefits programs could again be improved for police officers, teachers and others as part of an agreement between the supervisory board and Mr. Pierluisi. To generate net savings, the government will not replace employees who retire early, the governor said last month.

Blanca Paniagua has received a monthly pension of $ 1,200 since retiring in 2000 after a nearly three-decade career with public agencies, but said she still relied on her son for rent assistance.


Photo:

José Jimenez Tirado for the Wall Street Journal

Spiral retirement bonds are not unique to Puerto Rico. The pension burden has swelled in many other US cities and states after two decades of disappointing market performance, less than needed government and salary contributions, and losses during the 2007-09 financial crisis.

Some states such as Illinois and New Jersey are also heavily affected by pensions and bond debt, but federal law does not give states the ability to file for bankruptcy. According to Moody’s Investors Service, the most indebted large American city, Chicago, which does not have the authority of the state to declare bankruptcy, has bond debt of $ 11 billion and net pension liabilities of $ 53 billion. dollars.

I am very relieved that our pensions are not reduced, as it would affect my life tremendously.


– Blanca Paniagua, retired in Carolina, Puerto Rico

Investors in the wider municipal market remain unfazed. The demand for municipal debt and its tax-free returns exceed supply. The S&P Municipal Bond Index has risen 19% since Puerto Rico entered bankruptcy protection on December 22. Some of Puerto Rico’s debt even rose as the bankruptcy settlement merged, with general bond bond prices issued in 2014 hitting more than 86 cents on the dollar as of Dec. 10 from a low in 21 cents in 2017.

Blanca Paniagua began working in 1969 as an accountant in the Treasury Department of Puerto Rico before working with the territory’s nutritional assistance program. Since retiring in 2000, she has received a pension of $ 1,200 per month, she said, a benefit that will not be affected by bankruptcy. The 80-year-old Carolina resident said she was grateful as her pension barely covers electricity, gas and telephone costs. She relies on her son’s help to pay the rent.

“I am very relieved that our pensions are not reduced, as it would affect my life immensely,” she said.

Write to Andrew Scurria at [email protected], Sebastian Pellejero at [email protected] and Soma Biswas at [email protected]

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