The U.S. Department of Justice’s bankruptcy watchdog group appointed a committee of retirees in Puerto Rico’s bankruptcy to help with its debt-restructuring process, placing its severely underfunded pension system and transportation agency under court-ordered protection.
Puerto Rico filed the largest municipal bankruptcy in U.S. history earlier this month. In addition to roughly $50 billion in unfunded pension liabilities, the island also incurred around $70 billion in bond debt, according to Reuters.
MarketWatch reports that the Employees Retirement System (ERS) and the Highways and Transportation Authority (HTA) entered a debt-restructuring process that involves municipal bankruptcy in a federal court in San Juan Monday, with U.S. District Judge Laura Swain Taylor presiding over the case.
Those two systems are now under a federal debt-adjustment law known as Title III alongside the Puerto Rico government and its sales-tax bond issuer, known as Cofina.
A spokesman for Puerto Rico’s fiscal agency issued the following statement: “This is part of a court-supervised process within a framework that provides for an orderly restructuring of the debt of each entity and allows as much creditor consensus as possible.”
The implications of the pension system’s bankruptcy are likely to affect a staggering number of government retirees and pensioners who are up against bondholders in the restructuring of the island’s debts.
The federally-appointed board overseeing the island’s finances also called for the burden of debt-restructuring to fall on the shoulders of financial creditors instead of retirees by proposing a 10 percent cut in pension benefits and allocating less than a quarter of the debt service owed for the next 10 years, says the report.
The oversight board claimed cuts to pension benefits are crucial to pulling the island out of a crisis marked by a 45 percent poverty rate and unemployment more than double the U.S. average, reports Reuters.
Estimates vary as to the size of the gap between what the pension fund’s assets and its promises to its beneficiaries, but Puerto Rico projects the unfunded liability at roughly $45 billion, the product of years of deficient funding by government employers. ERS also owes $3 billion to bondholders. The highway agency owes roughly $6.3 billion in debt, including $1.8 billion to Puerto Rico’s insolvent industrial development bank, according to the oversight board.
The office of the U.S. Trustee stated in a filing in federal court in San Juan that Puerto Rico “clearly needs a retiree committee and sooner rather than later.” While a retiree committee is not entirely uncommon in bankruptcies that involve massive pension debts, it is unusual that an announcement to appoint such a committee was granted before the judge gave her blessing.
Robert Gordon, an attorney for a group comprising 91,000 retirees, argued during a court hearing last week that “they have earned the right to participate in this process.”
The Trustee is reportedly expected to complete the solicitation process for the committee by June 16.
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