After years of wrangling with its creditors, Puerto Rico disclosed a plan Friday for resolving the biggest governmental bankruptcy in United States history, by cutting $129 billion in debts to about $86 billion — a reduction of 33 percent. […]

Over the years, the government of Puerto Rico, seeing the huge problem the unfunded pension obligations presented, made some moves to limit the damage. In 2013, it forced new hires into a defined contribution plan, similar to a 401(k). A few years later, it forced all current employees, regardless of hire date, into such a plan.

Those moves did reduce the island’s pension obligations, but not enough to save the system from collapse. The new restructuring plan would cut the island’s $54.5 billion pension obligation to $45 billion, this time affecting even retirees. Their pension would be cut on a sliding scale: The biggest pensions would be reduced by, at most, 8.5 percent, and the smallest pensions would not be cut at all.

That will be a big complaint of general obligation bondholders, who cite the constitutional provision putting them at the front of the line to be paid.

Puerto Rico’s retirees, on the other hand, would normally be at the back. That’s because the island’s pension fund is completely empty after being used for years as a source of money to pay the government’s expenses. An empty pension fund would ordinarily make the retirees unsecured creditors entitled to almost nothing.

But the retirees make up such a large share of the island’s economy that leaving them in the lurch might chill efforts to rekindle economic growth.

So the federal board leaned on language in Promesa to improve the retirees’ legal standing. That language, not present elsewhere in American bankruptcy law, requires Puerto Rico to “provide adequate funding for public pension systems.” The board also persuaded the island’s lawmakers to dismantle the empty pension fund and in the future make each year’s pension benefits a mandatory outlay of the budget.

The result is retirees get a better deal than almost any other creditor group: at least 91.5 cents on the dollar.

Natalie Jaresko, the board’s executive director, said the board’s main goal was reducing Puerto Rico’s debts to a level its economy could sustain. That has been a two-step process.
First, the board looked at the debt burdens of America’s 10 most indebted states, calculated the average, and pared back Puerto Rico’s debt to an amount less than that. Then it began pushing for changes meant to make the government perform more efficiently, rebuild the public trust and encourage businesses to grow and hire. To make it all work, consumers on the island need to be able to spend money — including Puerto Rico’s pensioners.

_______________
This article quotes selections from “$129 Billion Puerto Rico Bankruptcy Plan Could Be Model for States” by Mary Williams Walsh and Karl Russell, in The New York Times, September 29, 2019. Read the whole article here.