He escuchado algunos abogados argumentar que el caso de In Re City of Stockton, 526 B.R. 35 (Bank. E.D. Cal. 2015) , es una situación similar a la de PR y por lo que aquí se dice es que no se tiene que reducir pensiones. Creo que la Legislatura logró un gran triunfo al evitar los cortes de pensiones pero quiero hacer claro que la situación en Stockton, San Bernardino y Detroit son muy diferentes a las de PR. En ese caso el Tribunal indicó lo siguiente, a las páginas 60-61:

Second, the assertion that pensions are not affected by the City’s plan of adjustment incorrectly suggests that employees and retirees are not sharing the pain with capital markets creditors. To the contrary, the reality is that the value of what employees and retirees lose under the plan is greater than what capital markets creditors lose.

One result of this case is that the City terminated its program for lifetime retiree health benefits valued on the schedules at nearly $550 million for existing retirees. Although Franklin says that sum is too high, it concedes that the value is at least $300 million. Prospective retirees also lose that expectation and receive nothing in return. In contrast, Franklin loses about $30 million.

Likewise, pension liabilities are also indirectly reduced as a result of curtailed pay and curtailed future pay increases in the renegotiated collective bargaining agreements. . . .

When evaluating the financial situation of the City, it is misleading to focus on comparing the situation on the day the chapter 9 case was filed with the situation at the time of confirmation. Any useful before-and-after view requires that one take into account the effect of the effort to reduce municipal costs during the several years before the case was filed. By the time the case was filed, the City had been pared down to core functions and been reduced to a situation in which such essential services as police and fire were being operated below sustainable standards. The murder rate had soared. Police responded only to crimes in progress. A wrecker had to accompany fire engines on emergency calls.

During the pre-filing mediation required by California law, agreements were achieved modifying all unexpired collective bargaining agreements. And there had been substantial progress on a new contract to replace the expired police contract, which was completed several months after the case was filed.

The quid pro quo for the concessions made by labor in the new and modified collective bargaining agreements was the City’s promise not to modify pensions subject to the servicing contract with CalPERS. Pensions would be neither increased nor decreased. This is neither irrational nor inappropriate. Pension underfunding is not a burning issue for the City, which is current on its pension contribution obligations. As noted above, on an actuarial basis the City’s two plans are funded at 82.6 percent and 88.5 percent, which is below the goal of 100 percent. This shortfall is primarily attributable to CalPERS’ recent reduction in its expected rate of investment return. Future required payments to return to a better funded status are built into the budget on which the plan is based; they are for a finite number of years and do not support the argument that the required contributions to CalPERS are on an endless upward spiral. The evidence suggests that funding ratios are improving, rather than deteriorating. To mandate that pensions be modified would so fundamentally change the balance in the labor negotiations as to unravel all of the concessions achieved.

En el caso de PR, no existe ese quid-pro-quo con las uniones ya que en el Gobierno (excluyendo las corporaciones públicas) no existe el derecho a huelga que hay en California.

En el caso de San Bernardino, la razón de que no se afectaron las pensiones fue una práctica

The San Bernardino disclosure gave the same basic reason as Stockton for not attempting to cut pensions in bankruptcy: Pensions are needed to be competitive in the job market, particularly for police.

“The city concluded that rejection of the CalPERS contract would lead to an exodus of City employees and impair the City’s future recruitment of new employees due to the noncompetitive compensation package it would offer new hires,” said the San Bernardino disclosure.

“This would be a particularly acute problem in law enforcement where retention and recruitment of police officers is already a serious issue in California, and where a defined benefit pension program is virtually a universal benefit.”

En Detroit, como se explica en este artículo, si se cortaron beneficios a las pensiones

General workers endured a 4.5 percent base cut in pensions and the elimination of an annual cost-of-living increase. The pensions of police and firefighters weren’t cut but an annual 2.25 percent cost-of-living adjustment was reduced to about 1 percent.

The city also sought to recoup $239 million from the optional annuity savings fund accounts of some general retirees who were credited with interest earnings that exceeded the retirement system’s actual investment returns.

The bankruptcy also helped Detroit slash its promised retiree health insurance benefits from $4.3 billion to $450 million.

Además de estas ciudades donde las pensiones han sido afectadas, Prichard, Alabama que radicó en el 2009 (esta ciudad dejó de pagarle a sus pensionados antes de radicar Capítulo 9) y Central Falls, Rhode Island en el 2012.

Como vimos, había razones claras para no cortar las pensiones en esas ciudades que no existen aquí. Bajo el 1003 aprobado por la Cámara no se cortan pensiones, sin que concurran las circumstancias que ocurrieron en San Bernardino ni los acuerdos en Stockton. Como siempre digo, hay que leer los casos, no dejarnos llevar por lo que otros dicen.

The Coming Public Pension Fight

The first in a series on Puerto Rico’s Pensions


Last week, the Supervisory Board held its 9th Public Meeting in Fajardo, Puerto Rico. A key item on the agenda, “Discussion of Pension Reform,” was over-shadowed by the pending fight over furloughs, but is perhaps one of the most important items discussed.


As many know, one of the critical issues before the Supervisory Board is how to address the future of Puerto Rico’s public pension system and a $49 billion actuarial deficit. In fact, this is one of the reasons Speaker Ryan and the Congressional Republicans insisted on having an expert like Andrew Biggs on the Board. His knowledge of pensions ostensibly would help reform Puerto Rico’s public pension system to become a model for cities and states across the country.


What PROMESA Says the Board Must Do


Section 211(a) of PROMESA requires the Board, if it determines pensions are underfunded, to conduct an analysis prepared by an independent actuary […] to assist the Oversight Board in evaluating the fiscal and economic impact of the pension cash flows.” The Board hired Pension Trustee Advisors, Inc., a Colorado corporation, for this endeavor in February. To date, we have yet to see any documents or plans generated by this company or produced by the Board.


Instead, the government with the support of the Board moved first. Since February, Puerto Rico passed a law to convert the government and its component units into a single employer and although the Board instructed that pensions had to be cut by 10% by fiscal year 2020 in the Fiscal Plan, the Board green-lighted the government to move over $2 billion from the General Fund to the public pension system. At the same time, neither Governor Rosselló nor the Board provided any monies for debt service in FY18. This had the effect of elevating payment of public pensions above secured creditors.


Then, on May 21, 2017, the Board filed a Title III bankruptcy petition for the Government Retirement and the Judiciary Retirement Fund. Further, the government passed a measure to transfer $390,480,000 from the Central Government, Judiciary and Teacher’s retirement funds to the General Fund for the payment of pensions, known as RC 188.


All of this was done with the Board’s approval, but not without opposition from other stakeholders. On July 27, 2017, Altair Global Credit Opportunities Fund (A), LLC and others filed an adversary proceeding to challenge this action by the Puerto Rican Government. Altair & company claim they have a lien over Government contributions to the retirement fund and that RC188 is null and void; that they hold a secured claim to the full extent of their allowed claim against the ERS; that they hold a secured claim to the full extent of their allowed claim against the Commonwealth and that their lien continues in any Pledged Property transferred to the Commonwealth from the ERS. They also claim that the transfer of the Pledged Property from the ERS to the Commonwealth pursuant to Joint Resolution 188, on its face, constitutes an unconstitutional taking of private property without just compensation within the meaning of the U.S. and P.R. Takings Clauses; and that RC 188 substantially interferes with their contract rights with the ERS in violation of the U.S. and P.R. Contracts Clauses. Finally, they also ask for damages and that PROMESA does not preclude such claim. Since it was filed only recently, we have no idea how Judge Swain will handle it, except that it will be done swiftly.


Echoes of the Chrysler-UAW Pension Bailout


This strategy by the Board – elevating pensioners over secured bondholders – evokes memories of the Chrysler bankruptcy, which saw the Obama Administration support unsecured UAW pensioners become secured creditors – literally jumping the line ahead of actual secured creditors. The judge in that case was none other than Judge Arthur Gonzalez, the key architect behind the Board’s legal strategy.


Neither the Constitution nor PROMESA explicitly do not allow for the payment of public pensions to be put ahead of bondholders, which was the ultimate outcome in the Chrysler case. Now, the PR Supreme Court granted pensioners rights in Bayron Toro v. Serra, 119 D.P.R. 605, 608 (1987), stating that, “Once an employee is retired, when he has complied with all the conditions for his retirement, his pension is not subject to changes or impairments.” However, this precedent is subject to Article VI, Section 8 of the PR Constitution that states:


“In case the available revenues including surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall first be paid, and other disbursements shall thereafter be made in accordance with the order of priorities established by law.”


While Section 201(b)(1)(C) of PROMESA states that the Fiscal Plan must provide adequate funding for public pension systems, Section 201(b)(1)(N) requires the Fiscal Plan to respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws.”


Moreover, the Committee on Natural Resources Report on PROMESA states the following:


“The Committee acknowledges the concern as to the ambiguity of the language regarding the funding of public pension systems. To clarify, Section 201(b)(1)(C) tasks the Oversight Board with ensuring fiscal plans ‘provide adequate funding for public pension systems.’ This language should not be interpreted to reprioritize pension liabilities ahead of the lawful priorities or liens of bondholders as established under the territory’s constitution, laws, or other agreements. While this language seeks to provide an adequate level of funding for pension systems, it does not allow for pensions to be unduly favored over other indebtedness in a restructuring.


Realizing that creditors and Congress are onto them, the Board has attempted to mask their strategy.


In their latest document, Explanatory Memorandum on Pension Reform,” the Board claims, “expenditures are being reduced throughout the Commonwealth’s budget and holders of government bonds are not likely to be repaid in full. Retirement plan participants, like other unsecured creditors, will have a reduction in the amounts paid to them by the Commonwealth.” Board member Ana Matosantos went further, rejecting Christian Sobrino’s claim that Governor Rosselló will fund 100% of the public pensioner’s benefits, stating “honoring 100% of the obligations is not workable.”


The Board has shown its hand, and they will face a stiff test before Judge Swain. Congress was clear that funding pensions was important, but not equal to or above existing constitutional and lawful priorities. To date, the Board and Puerto Rico have decided unsecured pensioners have higher priority.


Why is the Board and the government putting payment of pensions before payment of public debt in direct contradiction of both PROMESA and the Puerto Rican Constitution? Why is the Board pursuing this legal strategy?


I will explore and hope to explain the reasons for this in my series on public pensions in Puerto Rico.