Natalie Jaresko

FOMB Executive Director Natalie Jaresko >Carlos Rivera Giusti

Editor’s note: Second in a series on the FOMB’s FY 2021 Annual Report

With the U.S. District Court scheduled to hold hearings later this fall on the Plan of Adjustment to restructure billions of dollars in Puerto Rico government debt, the Financial Oversight and Management Board (FOMB) said it hopes the court will confirm the plan by the end of the year so that the island can exit bankruptcy and move on to a new “era of stability and prosperity.”

The Plan of Adjustment is among the highlights of the FOMB’s 232-page Fiscal Year Annual Report.

“The proposed Plan of Adjustment is a milestone on this path towards reducing Puerto Rico’s debt to sustainable levels and enabling economic growth,” said FOMB Executive Director Natalie Jaresko, adding that the plan comprises a series of agreements with a very diverse group of stakeholders, such as bondholders, unsecured creditors, retirees and unions.

Puerto Rico’s bankruptcy is not only the largest public debt restructuring in the history of the United States, but also extraordinarily complex, Jaresko noted. Puerto Rico’s $72 billion in debt was spread over more than a dozen public entities. The average debt service the government alone had to pay each year was $2.7 billion, and without PROMESA would have reached as much as $4.2 billion.

“In addition, the government owed retirees more than $55 billion in pension liabilities. Puerto Rico’s largest government pension system was about 1 percent funded – there was virtually no money left to pay retired government employees and pensions are now paid from the government budget rather than the insolvent pension trust,” she said.

The Plan of Adjustment for the central government is the largest part of Puerto Rico’s debt restructuring, with about $35 billion in claims by bondholders and creditors, and more than $55 billion in pension liabilities.

By the time COVID-19 hit in early 2020, the Oversight Board had already restructured COFINA’s debt, reducing it by $6 billion, from $18 billion to $12 billion and saving Puerto Rico $17.5 billion in total debt service payments, and reduced the Government Development Bank debt by $3 billion, from $5 billion to $2 billion, she explained.

According to the FOMB, the terms of the Plan of Adjustment provide the largest recovery of all claims classes to government retirees. The Oversight Board and the Official Committee of Retirees also agreed to take several steps to strengthen the pension system going forward. “For example, under the Plan of Adjustment, the Government would establish a pension reserve fund to support payment of pensions in any economic or political environment. In addition, if in any given year the Government budget surplus is larger than projected in the Certified Fiscal Plan, the reductions in retirement benefits can be reversed,” Jaresko said.

In addition, the Oversight Board agreed with the Public Servants United of Puerto Rico (SPU)/AFSCME Council 95 to provide up to $1.2 billion to restore employee contributions to the Sistema 2000 retirement plan that contributors lost because the money the government withdrew from employee paychecks never ended up in their retirement accounts.

The Plan of Adjustment also includes a $2,600 deposit per employee to defined contribution accounts of members hired before the implementation of Sistema 2000 who were also affected by the 2013 freeze of accrued interest. In addition, the Plan makes teachers and judges for the first time eligible for Social Security.

“Meanwhile, holders of general obligation bonds and Public Building Authority bonds face cuts of more than 25 percent. Holders of bonds issued by the Employee Retirement System face a greater than 80 percent cut. Creditors who filed an unsecured claim against the government, for example vendors who have not been paid as well as other pending litigations against the government, could see the value of their claim reduced by about 80 percent,” Jaresko said.

Protects Small Claims

Still, she noted that the FOMB also included terms that protect those with only very small claims. “Individual claims lower than $20,000, or if multiple claims are filed by the same claimant, below $40,000 in aggregate, will receive payment in full as part of the ‘convenience class.’ Someone who claims their vehicle was wrongfully confiscated by the government and filed a claim for $5,000, for example, would be fully reimbursed. Certain Puerto Rico residents who filed claims for unpaid pensions or back pay, or missing income tax refunds will be paid in full once the claim is validated through an Administrative Claims Reconciliation (ACR) process” she explained.

Overall, the Plan of Adjustment lifts a weight off future generations by reducing $35 billion of existing claims by almost 80 percent, to $7.4 billion of new debt. “The Oversight Board firmly believes that this is the best plan we could achieve under the legal and fiscal circumstances within which Puerto Rico finds itself,” Jaresko affirmed.

Managing Editor for The Weekly Journal. She is a journalist with more than 20 years of experience. Rosario received both of her bachelor’s and master’s degrees in International Politics from Georgetown University’s School of Foreign Service.

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