Gov. Wanda Vázquez García said over the weekend she supports the Puerto Rico Oversight Board’s plan of adjustment, removing an obstacle to the restructuring of the commonwealth's debt.
By supporting an adjustment plan that includes a reduction to pensions, she walked a different path than the one former Gov. Ricardo Rosselló said he’d have taken. Rosselló had said he would oppose any plan that cut pensions. Vázquez García was sworn in as governor on Aug. 7, five days after Rosselló resigned the office.
On Friday the board announced the plan, which would cut $35 billion in commonwealth, Public Building Authority, and Employees Retirement System debt to $12 billion in debt. It also cut the more than $50 billion owed to retirees in three pension systems, albeit by a much smaller percent.
“The governor’s approval is a strong positive for the plan,” said Matt Fabian, partner at Municipal Market Analytics. “Up until now, the board has not only faced an uncertainty over future economic and financial performance, but also over how, and how quickly, the Puerto Rico governments will attempt to undermine the board’s efforts.”
Chapman Strategic Advisors Managing Director James Spiotto said if the governor had opposed the plan, it would have posed a significant problem. Her endorsement may engender some public employee and legislator support, he added.
For her part Vázquez García said, “The decision we have to take today is reduced to the following: we respect the agreement reached by Retired Committee with the Financial Oversight and Management Board, which reduces pensions up to 8.5% or we risk facing greater cuts of up to 25% in pensions.” She said she couldn’t risk the deeper cut.
“My only interest has been to make an objective and careful analysis of what are really the best interests of pensioners in Puerto Rico,” Vázquez García said. “We cannot remain stuck in bankruptcy for many more years and like you, I want the Financial Oversight and Management Board to finish its work as soon as possible.”
Evercore Director of Municipal Research Howard Cure said, “This is the first time that I can recall that the commonwealth has been willing to undergo any haircut for its pension system. We will see if there is popular and political support for this.”
“The current governor’s effectively aligning herself with the board’s plan will practically beg the opposition party to run a campaign directly against the board’s plan, maybe creating more havoc for projections than otherwise,” Fabian said.
A board spokesman said that the pensioners, as members of the Committee of Retirees, will be voting on the plan. A spokesman for the Committee of Retirees confirmed this.
Spiotto said some bondholders may object to the process that the court is overseeing: first, accepting adversary proceedings challenging the board’s plan to treat late-issued debt differently from early-issued debt; second, freezing their challenge and telling them to handle it in a slow-moving mediation process; and third, allowing the board to file a plan including the disparate treatment of bonds during the mediation period.
Spiotto said there is a question whether it was legal to let a plan to be submitted and considered without first resolving adversary proceedings that challenge parts of it.
The board had submitted the plan partly as a way to pressure bondholders. The plan is the board’s statement of what will happen if no deal is reached, Spiotto said. If a deal is reached, the plan would be changed.
