Board, Government Clash Over Pension Cuts
BY LUIS J. VALENTÍN ORTIZ and CINDY BURGOS ALVARADO
As it did with a mandate to implement a furlough program for government employees, Gov. Ricardo Rosselló Nevares opposes an average 10% cut to pension benefits, as required by the commonwealth’s financial control board.
It will also be in federal court—and not through legislation—that the board would seek to enforce the measure, as part of Puerto Rico’s bankruptcy proceedings under Title III of the federal Promesa law.
“Pension reforms have become caught up in the Puerto Rican legal system. The courts have allowed some pension reforms [to] be enacted, others not…. I believe that dealing with pension reforms through what we know as a ‘plan of adjustment’ by the board would be a cleaner way…so they don’t get caught up in endless legal fights,” said board member Andrew Biggs during an interview with Caribbean Business.
The board has already filed a Title III case for the Employees Retirement Systems (ERS), which includes the judiciary. As for the Teachers Retirement System (TRS), Biggs confirmed the board will also file for Title III on behalf of the entity.
Biggs is a resident scholar at the American Enterprise Institute and expert in Social Security and pension reforms. He also leads the board’s efforts on the pension front.
He explained that although there is an average 10% reduction figure, roughly 25% of the island’s pensioners will not face cuts to their benefits, while most retirees will see reductions of less than 10%. Still, pension benefits would be reduced for roughly 125,000 people. These cuts would kick in 90 days after federal Judge Laura Taylor Swain confirms a restructuring plan for the commonwealth.
“The idea is that if you have a benefit that is below the poverty line—$1,000 per month, that includes both [pension] benefit and anything from Social Security—those people wouldn’t receive benefit cuts,” Biggs noted, “as cuts would be implemented “progressively.”
Gov’t vows to fight cuts
Although the board insists that the 10% pension reduction is part of the fiscal plan, the government argues that the measure, as is the case with reducing work hours for public employees, are nothing more than recommendations.
Public Affairs Secretary Ramón Rosario told Caribbean Business that the government’s position is that no pension will be cut, since the general fund can fully assume its payments, as established in the fiscal year 2018 budget. He added that the fiscal plan indicates that a committee would be created to analyze pension reform because no agreements were reached on the matter.
“The government’s argument [is] there is a fiscal plan, and any amendments by the board [are] recommendations. The lawyers will figure that out; I’m confident that’s not the case. But in any event, even if that’s true, the governor’s own fiscal plan proposed a 2.5% [pension] benefit reduction, which he is now walking away from,” Biggs said.
Rosselló initially announced he would only cut those pensions of more than $2,000 a month. Yet last Friday, the government’s representative to the board, Christian Sobrino, stressed payment to retirees would be “honored 100%” and that the reduction was not contemplated under a recently passed bill that seeks to reform the island’s retirement systems.
“There is now a measure in the Legislature [Senate Bill 603]. It sets out the government’s public policy that this 10% [reduction in pensions] will not be carried out,” Sobrino said when asked by this newspaper during the board’s public meeting last Friday.
As for the fiscal entity’s executive director, Natalie Jaresko, she refuted Sobrino by stating: “You have just announced that public policy on pensions is in conflict with the fiscal plan.”
However, Rosario insisted the government is not violating the fiscal plan and added that for the moment, the administration will keep pension benefits unchanged. If necessary, it would once again recommend that only those greater than $2,000 a month be altered.
“The position of the government is that it will be appearing in Title III court proceedings to defend the administration’s position, which is that we disagree with the cuts,” the public affairs secretary warned.
Other aspects of pension reform
In addition to the 10% cut to pension benefits, the board’s plans to overhaul the commonwealth’s pension system includes paying pensioners directly from the general fund; switching employees to defined-contribution plans; and ensuring Social Security enrollment for all government workers, including teachers, police and judges.
The first part of pension reform is already underway. The commonwealth’s certified budget already assumes the general fund will foot the bill of pension benefits due this fiscal year. SB 603 also formalizes the switch to the “pay-as-you-go” system, as the government will now pay pension benefits as they come due.
The bill—which as of presstime was still pending the governor’s signature—also provides for having all government employees move to a defined-contribution plan, under which their contributions are segregated into individual accounts that the government cannot tap for other purposes. These 401(k)-like accounts will be managed and invested separately and will belong to each employee.
“That was not very controversial on the board and, in most part, it wasn’t that controversial with the government. I think originally they didn’t want to shift teachers to a defined-contribution plan, or judges; we argued that all employees need to go to defined-contribution plans,” Biggs said.
However, the board member noted that language on SB 603 to this end “was insufficiently detailed or well-prepared.”
As for Social Security enrollment for police, teachers and judges, Rosario explained a bill is already presented for the Police Department. Legislation to have teachers participate in the federal program is also in the pipeline.
When asked whether the board will certify SB 603, Biggs replied: “It’s my expectation that recent legislation passed by the Legislature on pensions will be superseded by a plan of adjustment. Whether that means it’s rejected…I think a plan of adjustment is the most likely avenue [through] which pension reform is achieved.”