If it’s up to the Treasury Department, public employees in Puerto Rico who were promised pensions could be better off than investors who bought the island’s bonds.
A broad plan being put forward by the Treasury Department to ease Puerto Rico’s financial crisis would put pension payments to retirees ahead of payments to bondholders — a move that some experts fear could rattle the larger municipal bond market.
The proposal was being driven by evidence that Puerto Rico’s pension system is nearly out of money, leaving retirees who are dependent on it financially vulnerable.
“The major problem is, the entire pension system is close to being depleted,” said Antonio Weiss, counselor to Jacob J. Lew, the Treasury secretary. “But 330,000 people depend on it. It’s unfunded, and they have to be protected.”
Shielding retirees from pension cuts, the thinking goes, would not only protect thousands of older residents on the island, but it might also encourage younger retirees to stay there, rather than move to the United States mainland in search of new jobs and incomes.
Out-migration is considered a prime cause of Puerto Rico’s financial tailspin, because it shrinks the island’s economy, leaving fewer people and fewer dollars to support the crushing debt.
Puerto Rico is said to have about $72 billion of financial debt outstanding, most of it in the form of municipal bonds. By some estimates, it has incurred an additional $43 billion in unfunded pension obligations.
But deciding that pensioners’ interests should be put above those of bondholders — if a choice must be made — is not without certain risks.
Some public-finance experts say they fear that if Puerto Rico can renege on promises to pay debts to investors, while sparing retirees, other municipalities might try to do the same, casting a pall over the larger market in municipal bonds, where American towns and cities have gone for decades to get the money they need to build roads, schools and other public works.
If Puerto Rico gets special treatment, “you have huge contagion risk to the entire municipal market,” Andrew N. Rosenberg, a partner at the law firm Paul, Weiss, Rifkind, Wharton & Garrison, said at a recent gathering of creditor representatives.
Treasury officials said such concerns were unfounded. The framework they are proposing would be designed only for distressed United States territories, like Puerto Rico, and could not be used by states or municipalities on the mainland.
Photo
Ismael Rivera is a police officer on the island, who might also be helped by the Treasury’s plan.Credit Dennis M. Rivera Pichardo for The New York Times
Officials pointed to a report by an investment firm, Nuveen Asset Management, which said, “We believe most institutional investors understand Puerto Rico’s unique situation and the coming debt restructuring will not create widespread credit implications.”
Still, moving public pensions to the top of the stack would infuriate at least some bondholders — especially those who paid close to face value for their bonds years ago, when they were still rated investment grade, and who had expected to hold them to maturity and get all their principal back.
Although the bondholders have often been portrayed as deep-pocketed vultures since Puerto Rico’s debt crisis began, many of them are small investors, themselves trying to save for a comfortable retirement.
“Most Puerto Rican debt is held by individuals,” said Thomas Moers Mayer, a lawyer representing two large mutual fund companies, Franklin Advisers and OppenheimerFunds, which together own about $10 billion in Puerto Rican debt securities. “They are mostly over 65, and they mostly have incomes of less than $100,000 a year. They are not vulture funds. They are your friends and neighbors.”
Some Republican senators — notably Charles E. Grassley of Iowa and Orrin G. Hatch of Utah — whose constituents are among the bondholders, have expressed similar views. Puerto Rico’s debt is unusually widely held because it offered above average yields and interest that was exempt from federal, state and local taxes, no matter where the buyer lived.
Treasury officials have said they are willing to work with Congress to find a suitable way of handling the different categories of creditors.
Financial help for Puerto Rico will be the subject of a hearing on Thursday by the House Committee on Natural Resources. Mr. Weiss is scheduled to be the sole witness.
Any rescue plan would need congressional approval and various committees in the House and Senate are weighing ways to help the island reduce its debt and better manage its economy.
Paul D. Ryan, the Republican speaker of the House, has set a deadline of March 30 for a House version of a bill. A version of Treasury’s plan was outlined in a draft bill presented to a Senate committee; it has not been voted on.
The draft, obtained by The New York Times, also calls for a five-member “fiscal reform assistance council” appointed by the president to hold the island to meaningful budgeting, disclosure and fiscal reform practices. The board would have the power to make across-the-board budget cuts if necessary.
Members of Congress, especially Republicans, have expressed concern about whether Puerto Rico has the wherewithal to manage its future finances, even if it gets help in the short term. Credit markets have also been reluctant to invest further in Puerto Rico’s bonds without some assurances that the island’s finances will be better managed in the years to come.
The idea of an oversight board has rankled residents, however, who say it has overtones of colonialism.
The part of the proposal that gives priority to pensioners has received little attention. Currently, Puerto Rico’s laws and Constitution give top priority to general-obligation bonds — the type backed by the government’s “good faith, credit and taxing power.”
Puerto Rico is not unique in this respect; for decades, the general-obligation bonds of all the states have been marketed as virtually default-proof, safe enough for widows and orphans. The concept was developed after the Civil War, as a way to rebuild investor trust after a number of notorious bond defaults.
Other bonds carry with them varying degrees of legal repayment security. Puerto Rico’s debt is extraordinarily complex, but in general, its bonds can be ranked in a hierarchy of eight levels, with general-obligation bonds at the top. The ranking is described in an analysis of the debt by the Center for a New Economy, a nonpartisan research group in San Juan.
Public workers’ pensions, the center found, fall on a second hierarchy altogether, which sets priorities for the government’s operational disbursements. Here again, however, payments due on general-obligation bonds come first, followed by payments due on legally binding contracts. Outlays for pensions come third.
That means that under existing law in Puerto Rico, if there is not enough money to pay both general-obligation bonds and public retirees’ pensions, the money would go to bondholders.
But the Treasury’s proposed restructuring framework would change that. It would require that the restructuring plan “not unduly impair the claims of any class of pensioners.”
General-obligation bondholders, on the other hand, would get such protection only “if feasible,” according to the draft that outlined the plan.
This new legal framework is being created because Puerto Rico, as a United States territory, has no access to bankruptcy laws, where complicated claims by creditors can be worked out in a court under the supervision of a bankruptcy judge.
Puerto Rico has already defaulted on some of its bonds. More payments are due in May and June. Bonds are now nearly impossible to sell, and members of Congress, especially Democrats, as well as financial experts say the island’s troubles will become increasingly enormous if some kind of restructuring framework is not approved soon.
Senator Schumer asked unanimous consent that the Senate take up and pass S.1774 , Puerto Rico Chapter 9 Uniformity Act of 2015. Senator Hatch objected. Unofficial Transcript : SCHUMER: I AM GOING TO ASK FOR A UNANIMOUS CONSENT REQUEST BUT SPEAK FOR A COUPLE OF MINUTES AND ENGAGE IN SOME DISCUSSION WITH MY DEER FRIEND, THE SENIOR — MY DEAR FRIEND, THE SENIOR SENATOR FROM THE STATE OF UTAH. I WANT TO THAIPG HIM FOR COMING TO THE FLOOR TODAY ON THIS ISSUE. I’M — ON PUERTO RICO. I AM HEARTENED HE HAS EXPRESSED INTEREST IN WORKING WITH US TO GET DOES ON TO HELP OUR FELLOW CITIZENS IN PUERTO RICO. I ALSO WANT TO THANK MY FRIENDS, THE SENATORS FROM CONNECTICUT, NEW JERSEY, OREGON, WASHINGTON, ILLINOIS, AND MY COLLEAGUE FROM NEW YORK WHO IS HERE FOR THEIR STEADFAST SUPPORT FOR HELPING PUERTO RICO IN THIS TIME OF CRISIS. I RISE TODAY DEEPLY TROUBLED BY THE DIRE ECONOMIC, FINANCIAL, AND HEALTH CARE SITUATION IN PUERTO RICO. THE ISLAND IS FACING A FINANCIAL CRISIS, A HEALTH CARE ...
A new report from the World Bank just landed, finding that a record low of 10% of humanity now live in extreme poverty, down from 11% in 2013. But poverty rates aren’t anywhere close to equal between continents or even countries, as our new series of maps clearly demonstrates. The World Bank provides an in-depth explanation for its methodology, which you can find in Appendix A of the full report here . We focused on the percentage of people in each country living below what the World Bank defines as extreme poverty, or $1.90/day. We’ll let the researchers defend this definition on their own, but there is one caveat to keep in mind. It can be extraordinarily difficult to collect reliable data from so many countries on a regular basis, and in fact we used the latest year in which numbers were available whenever possible. For example, in some of these maps we compare 2011 figures against 2015. In short, our maps provide the clearest possible apples-to-apples compa...
Earlier this week, congressional Republicans introduced two bills designed to help Puerto Rico cope with its unsustainable $72 billion debt obligation. Both pieces of legislation—introduced in the House by Rep. Sean Duffy (R-Wisc.) and in the Senate by Sens. Orrin Hatch (R-Utah), Lisa Murkowski (R-Alaska), and Chuck Grassley (R-Iowa)—included language that would create a federally-appointed oversight board to control the island's finances . The House bill also included provisions that would permit Puerto Rico's cities and publicly-owned institutions to restructure debt under federal bankruptcy law. While the island's legislators and activists have long wanted bankruptcy protection, the creation of such a powerful oversight board immediately prompted a strong and negative reaction among the island's politicians and activists. "The bill introduced by Chairman Hatch imposes a federally-appointed board that would have virtually total control over financial decision-...
Comments