Friday, May 24, 2019

Puerto Rico fiscal board calls for agreement on owed Paygo pension contributions

By on May 7, 2019

The executive director of Puerto Rico’s Financial Oversight and Management Board, Natalie Jaresko
(CB file)

Insists 24 joint resolutions appropriating $30 million must go through budget process

SAN JUAN – The executive director of Puerto Rico’s Financial Oversight and Management Board, Natalie Jaresko, on Monday called upon several public corporations and municipalities to reach an agreement with the government before the end of the fiscal year regarding the amounts they owe in pay-as-you-go pension contributions for current retirees.

Jaresko also called attention upon the public corporations and towns that are not contributing to the defined contribution accounts for future government retirees, despite withholding the money from employees’ paychecks.

At a news conference, Jaresko also insisted that 24 joint resolutions by the government, appropriating about $30 million, must go through the budget approval process to be valid. Joint resolutions are not exempt from the budget certification process, regardless of legislative approval, Jaresko said.

The requests come days before the board certifies the commonwealth fiscal plan at a public meeting Thursday.

On April 30, the board pointed out that $340 million had been accrued in so-called Paygo debt by 28 public corporations and 66 municipalities in violation of Act 106 of 2017. The Paygo scheme was implemented because the commonwealth retirement systems were insolvent.

“The commonwealth is paying retirees but that extra spending needs to be collected from those public corporations or municipalities or found in some part of the budget,” Jaresko said, adding that the “budget assumes everyone will pay their portion.”

How can the problem be solved? Jaresko said public corporations and the commonwealth can offset their payments. For instance, the central government can offset Paygo payments owned by the Puerto Rico Aqueduct and Sewer Authority with the money the commonwealth owes the utility in water service.

“There is no danger that retirees won’t get paid because Paygo is guaranteed by the commonwealth,” she said.

Some towns and public corporations have said the calculations that have been made as to how much they owed in Paygo allocations for retirees are not correct. For instance, San Juan has said its allocation went from $4 million to $50 million.

“The parties need to work it out and before the end of the fiscal year,” she said. “All I say is that everyone get in a room together and work it out.”

Jaresko also noted problems with the payments in pensions for future retirees. Some 20 municipalities and seven public corporations are not remitting individual payroll withholdings for their employees’ defined contribution plan, which is slated to become privately managed in the summer. Current employees are now part of a defined contribution program and monies are withheld from their paychecks and put into the plan for their future.

Jaresko said she does not want to see a repeat of the Sistema 2000 plan, a hybrid retirement plan, which was not funded even though the money was withheld from employees’ paychecks. To date, she said, the Sistema 2000 plan remains unfunded.

“That is what we are seeing and we want to see that it ends,” she said. “We are watching and bringing attention to this issue but under Puerto Rico law they must deposit the funds.”

Regarding the $30 million allocated in 24 joint resolutions Jaresko said there was an agreement in place that any allocations had to be within the budget. Some of the appropriations date as far back as the 1980s and ’90s, making it difficult to verify available revenue to fund the expenditures. Best budgeting practices match same fiscal year revenue with expenditures, including resolutions.

The board had made the government aware of its non-compliance in a letter dated Feb. 28 and had requested notification of any disbursement of funds. As of Monday, the government had not submitted the requested information. If the information is not received by May 15, the board will proceed with exercising its authority under Promesa.

Jaresko also said a significant number of banks, accounting firms and law firms involved in bond issuances that violated constitutional limits signed tolling agreements to delay the statute of limitations the government had to claims against them.

The tolling agreements required the board to keep the names of these firms confidential until an adversary proceeding was filed against them. However, they may never be sued nor their names revealed.

Lawyers for the Special Claims Committee said at an omnibus hearing April 24 that they were going to sue 27 underwriters, nine law firms and five accounting firms for their role in debt that may have been issued in contravention of debt limits in the Constitution. The lawyers said their names would be revealed.

A week later, the board filed three sets of lawsuits on behalf of the commonwealth before a May 3 statute of limitations deadline for avoidance actions, which are those filed on behalf the debtor to bring back assets transferred illegally or fraudulently.

The first set of lawsuits was filed against third-party vendors seeking the return of so-called fraudulent transfers for vendors that got paid by the government $2.5 million or more. A fraudulent transfer may not mean actual fraud, it is a payment made for which Puerto Rico did not receive “reasonably equivalent value” in exchange or money the government spent knowing it was insolvent. The suits seek about $4 billion from more than 250 vendors.

A second set of lawsuits was filed to recover more than $1 billion from holders of bonds issued in excess of Puerto Rico’s constitutional debt limit. A third set of lawsuits was filed against firms and advisers that helped with the issuance of the bonds that were underwritten in contravention of the law. The suits are part of allegations that $6 billion in general obligation bonds issued in 2012 and 2014 violated the constitutional limits.

However, the board failed to sue many accounting firms and banks implicated in the illegal issuance of bonds.

When asked, Jaresko said the entities were given an opportunity to sign a tolling agreement to give the board and counterparty time to attempt to consensually resolve the issues.

As part of the court-approved tolling agreements between the Special Claims Committee and the Unsecured Creditors Committee, the commonwealth agreed to keep the names of the potential defendants confidential pending the filing of an adversary proceeding.