That request came one day after Elias Sanchez, Puerto Rico Governor Ricky Rossello’s representative to the Oversight Board, announced a “major restructuring” of government spending that would allow his administration to continue to pay into pension systems, citing the need to provide for their 180,000 pensioners. Part of that restructuring appears to be already underway in the form of recently introduced “single employer” legislation on the island. The bill has been lauded by many as a step in the right direction, although there is a risk that it could push billions in pension liabilities of municipalities and public corporations to the Commonwealth’s already overburdened General Fund if not done properly.
However, while Puerto Rico’s pension system is a mess and needs major changes to make it solvent, we would all do well to slow down and take a breath. As we outlined in a previous piece, actuaries estimate that the system will be more or less cash flow neutral for the next few years, and there is enough money in the system, together with contemplated current year contributions, to keep pensions running on schedule for several more years. The government should take heed to avoid letting a crisis mentality force it to piece together a substandard reform plan in haste that fails to make structural reforms to its pension plan.
Governments with fiscal problems often resist making significant pension reform, since those affected complain quite loudly. For instance, despite a court ruling that cities could alter their pension obligations in Chapter 9 during Stockton, California’s protracted bankruptcy battle, several bankrupt California cities, including Stockton, Vallejo, and San Bernardino, ultimately chose to forego reform, fearing a ferocious and costly fight from the California Public Employees Retirement System. In his ruling approving Stockton’s eventual exit from bankruptcy protection, the same judge called CalPERS a “bully” with an “iron fist.”
Instead, these cities pursued more draconian service reforms that reduced their citizens’ quality of life. For instance, San Bernardino plans to outsource more services, including its fire department, and its citizens have seen both crime rates and taxes jump. Vallejo’s pensions continued to be a major drag on the city’s balance sheet long after it exited bankruptcy, and its vice mayor described them the “biggest part of (Vallejo’s) problem” two years after its bankruptcy ended.
While it is understandable that municipalities would hesitate to adjust pensions, it’s regrettable: history shows that governments do not get a second chance to get pension reform right, and those who fail to insufficiently address the problem in their first pass only kick the can further down the road and exacerbate the difficulties of economic recovery.