The implications of Puerto Rico's pension plan crisis: a teaching moment.

AuthorBrock, Emily Swenson
PositionFederal Focus

GFOA is focused on ensuring that any federal support plan for Puerto Rico is specific to the island and does not include elements that would undermine the authority of mainland state and local governments to effectively govern and finance their pension plans.

The Commonwealth of Puerto Rico's financial condition has been a matter of concern for several years, and efforts to devise a strategy that would return the territory to fiscal solvency and protect bondholders have been underway for months. As the U.S. Treasury Department, Speaker of the House, and Chair of the Senate Finance Committee have proposed options to address Puerto Rico's debt crisis, the Government Finance Officers Association (GFOA) is focused on ensuring that any federal support plan for the island is specific to Puerto Rico and does not include elements that would undermine the authority of mainland state and local governments to effectively govern and finance their pension plans.

THE SITUATION

Even after raising taxes and severely cutting its budget, Puerto Rico needs to close a cumulative fiscal deficit of $63.4 billion over the next 10 years, not including its estimated $43 billion in unfunded pension obligations. Puerto Rico's unsustainable debt load is significantly higher than that of any U.S. state. (1) As of March 1, 2016, Puerto Rico has repeatedly warned that it will have to modify its debts either by delaying payments or persuading creditors to accept less than they are owed.

The territory doesn't have a mechanism for municipal bankruptcy and has asked Congress to create one for it. Puerto Rican officials have said that they need to restructure their debt burden but first need the protection of Chapter 9, which covers insolvent municipalities in the 50 states. Others say the Territorial Clause of the U.S. constitution may give Congress the authority to enact laws that would allow Puerto Rico to restructure its debt without declaring bankruptcy. This leaves the territory in a complex conversation about debt restructuring, with an electorate divided over any federal solution that smacks of neocolonialism, Congress divided along party lines over what elements should be included in such a solution, and creditors working to develop their own proposals to deter the government of Puerto Rico from accepting any federal support.

FEDERAL PROPOSALS

The U.S. Treasury Plan. The U.S. Treasury Department proposed a new legal framework in response to Puerto Rico's already defaulting on some of its bonds. Members of Congress and some financial experts say that Puerto Rico's troubles will become increasingly unsolvable if some kind of restructuring framework is not approved soon. Under the Treasury's proposal, Puerto Rico would be able to avoid bankruptcy, with the White House and Congress appointing members of a financial control board that would oversee a comprehensive restructuring of the territory's overall debt.

The Senate Plan. House Speaker Paul Ryan (R-WI) and House Natural Resources Committee Chairman Rob Bishop (R-UT) have organized a similar approach. Republicans have developed a different proposal. In the Senate, Senate Finance Committee Chairman Orrin Hatch (R-UT) has introduced the Puerto Rico Assistance Act of 2015 (S 2381). The bill aims to address Puerto Rico's potential bond default by slashing employee payroll taxes and extend targeted funding beyond addressing Puerto Rico's deb. However, the bill would include...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT