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Ambac questions Puerto Rico board assertion that pension liabilities rose $5 billion

By on June 19, 2019

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Bond insurer seeks full discovery into obligations

SAN JUAN — A municipal bond insurer wants to know why between the May 9 release of Puerto Rico’s new fiscal plan and the planned support agreement for commonwealth debt announced June 16, pension obligations grew by about $5 billion, to $55 billion.

For that reason, Ambac Assurance Corp., which holds or insures more than $1 billion in bonds from Puerto Rico and its instrumentalities, wants the U.S. District Court to allow full discovery into pension liabilities.

In a motion submitted in court Tuesday, Ambac said the government has not been fully forthcoming in providing adequate analysis. While it has obtained some documents from the government, it said it is no closer to understanding the “massive figure in pension liabilities.”

In each of the fiscal plans certified by the island’s Financial Oversight and Management Board during these Title III cases under the Puerto Rico Oversight, Management and Economic Stability Act (Promesa), including the most recent one certified May 9, pension liabilities have totaled $50 billion, Ambac said.

“At no time, however, has either the Commonwealth or the Oversight Board investigated or substantiated that massive figure; rather, virtually all attention to the pension liabilities has focused on the amount of any actual or proposed cuts to the overall number, rather than to the overall claimed liability amount. Transparency into the size and scope of the Commonwealth’s true pension liabilities is necessary if the Commonwealth is to pursue a restructuring of its liabilities and successful exit from bankruptcy,” Ambac said.

The insurer said it engaged in a discovery process with Puerto Rico’s Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym), which provided reports produced by the actuarial firm Milliman Inc. However, the firm’s reports “expressly disclaimed any assessment over the integrity of the data provided by the Commonwealth,” Ambac said.

“Despite slowly rolling productions from AAFAF, with very limited exception, Ambac is no closer to understanding the $50 billion asserted pension liability today than it was over a year ago,” the insurer stressed.

While Ambac said it understands the importance of pensions and does not question their legitimacy, they should not be insulated from scrutiny.

“Given the gargantuan scale of the asserted pension liabilities, even relatively minor flaws (on a percentage basis) in the actuarial analysis have the potential, when corrected, to free up billions of dollars for other purposes,” the firm said.

The fiscal board has reached agreements with different groups to restructure pensions. On June 3, the Puerto Rico Teachers Association announced support for an agreement, which was ultimately rejected by union members, with the board regarding the treatment of pensions in a future commonwealth plan of adjustment.

On June 10, the United Public Servants Union made a similar announcement for an agreement with the board that includes a $1.36 billion investment to ensure pension funding for workers. On June 12, the Official Committee of Retirees announced it had reached a tentative pension deal that calls for a raised minimum-pension threshold below which cuts will not be imposed. The deal would also cap cuts to monthly pensions at 8.5%. The board had initially proposed cutting 25%.

The Committee of Retirees’ debt deal is slated to be included in the planned support agreement (PSA) announced by the board June 16, which would restructure about $35 billion in general obligation and Public Buildings Authority debt.

Ambac reiterated that in a summary of the latest PSA, the board states that $55 billion of pension liabilities are expected to be adjusted through the commonwealth’s plan of adjustment.

“Between the release of the New Fiscal Plan and the PSA, pension obligations have ballooned approximately $5 billion more, and yet Ambac and other creditors are no closer to understanding the assumptions underlying the massive figure,” Ambac said.

Judge Laura Taylor Swain agreed Tuesday to discuss Ambac’s request at the July 24 omnibus hearing.

The board didn’t immediately return a request for comment for this report.

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