Obama's Disastrous Plan for Puerto Rico
Puerto Rico is on the brink of defaulting on its debt. And the Obama administration wants to push Puerto Rican pensioners to the front of the payment line, ahead of Americans with retirement accounts that hold constitutionally protected bonds.
The administration recently shared with Democratic lobbyists its "pre-decisional" draft proposal for how to handle the looming default. Referring to roughly 330,000 active and retired Puerto Rican public employees, the proposal includes instructions to "not unduly impair the[ir] claims." Only after these pensioners are assured their due claims, and only "if feasible," would General Obligation and other bondholders receive any kind of repayment.
Unfortunately, those other bondholders include legions of ordinary workers and retired Americans (including Puerto Ricans who thought they were being patriotic by investing their life savings in Puerto Rican bonds). Many of them invested in prioritized bonds -- sold at a premium with the promise that the purchasers would be first in line if Puerto Rico couldn't meet all its obligations.
Now the president wants to change the terms. Why?
Puerto Rico is in a hard place. Roughly $72 billion in debt, it defaulted on debt payments twice last year. It faces even bigger obligations this year, which it can't possibly meet -- at least not without more meaningful austerity measures. (Eliminating $120 million in Christmas bonuses for public employees would be a start.)
In addition to this debt, Puerto Rico faces about $44 billion in unfunded pension liabilities. Pension shortfalls -- some $750 million annually -- will soon have to come from the island's limited general revenues.
Gov. Alejandro Garcia Padilla has not publicly disclosed key financial information such as how much money the commonwealth has on hand, how much it is taking in, and the size and timing of its unfunded pension obligations. But he may have disclosed that information to the administration. With or without precise numbers, the math is bad for the island.
Some have suggested granting the island retroactive access to Chapter 9 bankruptcy. This would leave some creditors out of luck (investment promises to the contrary) and would address only about 30 percent of the commonwealth debt. Even if all creditors were thrown to the wolves, ordinary Chapter 9 bankruptcy could only reduce the island's total debt to about $50 billion. Tack on the unfunded pension obligations and total commonwealth debt would stand at $94 billion, well above the "unpayable" mark of $72 billion.
Presumably, that's why the administration wants to throw creditors under the bus -- because if it doesn't, Puerto Rican pensions will have to take a hit too.
If Puerto Rican pensions were paltry, there might be just cause for protecting them. Pushing retirees into poverty would impose additional costs on the island. But with annual Christmas, summer, and medication bonuses, as well as more than $1 billion in subsidized loans to members for home purchases and cultural vacations, there's room for cuts without pushing pensioners onto the streets. After all, Puerto Rican retirees also receive Social Security and Medicare benefits.
The administration's proposal would wrongly violate contractual prioritization for hundreds of thousands of U.S. investors -- many of whom are retirees -- all to preserve the pensions of Puerto Rico's public employees. That's unfair.
Worse, it would set a very dangerous precedent. State and municipal pension plans across the U.S. are underfunded by at least $3 trillion. Would the president also propose wiping out all state and local bondholders before insisting on state and local pension reform?
Before bailing out the island through any form of Chapter 9 bankruptcy or outright financial assistance, the federal government should do what it can to help Puerto Rico's economy grow. It could start by exempting the commonwealth from the federal minimum wage and the maritime Jones Act, and giving it greater flexibility in administering federal welfare benefits.