With a Congressionally appointed federal control board about to take over Puerto Rico’s finances, the U.S. territory just admitted that its massively spiked public pension plan owes another $43 billion.
Designated by the United Nations as the “Oldest Colony in the World,” the U.S. territory defaulted on $70 billion in municipal bonds and $2 billion of interest on July 1. Unable to file for bankruptcy under federal Chapter 9 Municipal Bankruptcy Law, like the State of Arkansas did in 1933, Puerto Rico looked to the federal government for help.
The Obama Administration teamed with a bipartisan majority in Congress to pass”The Puerto Rico Oversight, Management and Economic Stability Act” (PROMESA), which turned over the island’s finances to a federally appointed committee.
Breitbart News reported that the big motivation for taking over America’s worst welfare den was the fear of “1 Million Puerto Ricans Migrating to Mainland” if the hedge fund “Vulture Capitalist” investors who bought up the island’s bonds debt at about 30 cents on the dollar were able to use lawsuits to shake down the U.S. government for a bailout by jeopardizing the island’s ability to pay for schools, police officers and health care.
The legislation gave the control board de facto authority to sell government assets, consolidate agencies, and fire government workers in order to put the country’s books in order. It also retroactively put a stay on bondholder litigation.
One key reason Puerto Rico’s economy imploded was the Popular Democratic Party-controlled legislature making Spanish the official language for all schools and government use in 1991. As a result, 86 percent of the island does not speak English in the home and almost a third of the residents are on welfare. Poor language skills prevented relocating call-centers and other U.S. service businesses to Puerto Rico.
In the newest disaster for Puerto Rico, a recent audit revealed that the Puerto Rico Employees’ Retirement System and two smaller public pension plans only have about $1.8 billion in assets to pay $45 billion in pension liabilities. About one in 10 Puerto Ricans are either government public employees, retirees, or beneficiaries, according to the retirement system. But even more challenging, there are 120,169 retirees and beneficiaries, compared to just 118,780 public employees still working.
Rather than paying anything to the defaulted bondholders, Puerto Rico’s Governor Alejandro Garcia Padilla increased the island’s annual cash contribution to the pension plans in July to $747.3 million, up from about $400 million in 2015.
The vulture capitalists holding Puerto Rico’s general-obligation debt immediately filed a lawsuit against the governor, claiming his administration was diverting cash for debt payments to pension contributions in violation of its Commonwealth’s Constitution.
Ted Hampton, a credit analyst with the New York offices of Moody’s Investors Service, told Bloomberg: “Everything is coming to a head on the pensions versus debt question and the oversight board will have to quickly take charge of this and try to determine how to prioritize and manage this situation in a way that’s consistent with the law.”