A Desperate Pension Liability: Measure Twice, Slash Once
In the fallout from the financial crisis, there was a 2010 episode of NBC's "Parks and Recreation," duirng which our heroes had to deal with massive budget cuts due to tax revenue shortfalls. At one point, libertarian Ron Swanson starts cheering "Slash it! Slash it!"
Swanson even brings little homemade "Slash it" flags to underscore his message.
While that attitude could be a bit insensitive in real budget decisions, many indebted parts of the country would benefit from a bit of stern libertarianism. The most notable these days is the Commonwealth of Puerto Rico, whose budgetary woes have become the thing of legend.
The situation in Puerto Rico is bleak and has been for a long time.
The island is sitting atop a $73 billion mountain of debt — 70% of its annual GDP — and absolutely no way to repay that debt through its own means.
Puerto Rico's economy doesn’t have the muscle to pull itself out of debt, and that was before being hit by worst recorded natural disaster in its history, as well as a mass exodus of its labor force.
Now, news just broke than fraudsters have scammed the island out of $4 million of public funds.
Realizing dramatic measures had to be taken, the federal government intervened three years ago, creating an oversight board to restructure the territory’s debt and manage its infrastructure projects with the Puerto Rico Oversight Management and Economic Stability Act ("PROMESA").
PROMESA is also the Spanish word for "promise," so at least the congressional staffer coming up with this acronym knows what they’re doing.
Among the many problems facing the Puerto Rican government is the inability to cover more than $50 billion in unfunded pension liabilities for public employees.
PROMESA’s current plan of adjustment lays out a strategy for restructuring this obligation, and yes restructuring has to mean "Slash it!" at this point.
No one likes the idea that something they were promised isn’t going to be there for them, but that’s the unfortunate reality.
Creating a further problem is this significant question: Do those cuts go far enough given the magnitude of debt restructuring necessary?
If Puerto Rico gets back on its feet financially, it won’t get access to capital markets — if the island proves (again) to be a bad place to send money — creditors won’t send money there, making Puerto Rico’s future even more uncertain than it already has shown to be.
Transparency has always been a problem throughout the Commonwealth’s bankruptcy process. This raises serious questions about pension estimates.
The liability might be even worse than $50 billion — and remember this is a territory with an annual GDP of only $100 billion. So these pensions require a reliable top-to-bottom audit before we can even begin talking about restructuring, something members of the House of Representatives are urging too.
Creating a further problem there is that the the only accounting firm that has done auditing services for the teachers’ pension fund (the second largest public pension in Puerto Rico) is BDO, which has recently run afoul of the law.
BDO executive Fernando Scherrer Caillet was among several high-profile arrests for a sprawling corruption conspiracy in Puerto Rico in July. Allegations include money laundering, wire fraud, and outright theft.
The final indictment count? Thirty-two serious allegations.
Scherrer stepped down as managing partner at BDO Puerto Rico, with one Bloomberg reporter wryly observing this "was the right thing to do because running an accounting firm like BDO from a jail cell (probably) would be very difficult."
Continuing with BDO is clearly untenable, and restructuring can’t proceed without a clearer picture. Congress has taken notice of this and — with refreshing bipartisanship —House Natural Resources Committee Chair Rep. Raúl Grijalva, D-Ariz., has called for the PROMESA Oversight Board to order a trustworthy audit of the island's public debt.
The situation in Puerto Rico is not hopeless. As far as annual GDP, it ranks 38th among America’s 56 states and territories. It provides a nice island getaway for people who may still want to stay in the United States. If it can get pointed in the right direction, it will restore investor confidence and motivate some displaced Puerto Ricans to return to work there. Nobody wants to see it – as Anita sings in West Side Story – "sink back in the ocean."
So — measure twice, slash once.
Jared Whitley is a long-time politico who has worked in the U.S. Congress, White House, and defense industry. He is an award-winning writer, having won best blogger in the state from the Utah Society of Professional Journalists (2018) and best columnist from Best of the West (2016). He earned his MBA from Hult International Business School in Dubai. To read more of his reports — Click Here Now.
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