Puerto Rico Considers Pension Cuts

U.S. Treasury Secretary Jack Lew indicated the possibility for pension cuts to help diminish Puerto Rico’s debt crisis during a visit to the island earlier this month. Puerto Rico has defaulted hundreds of millions in bonds in recent months due to the financial crisis, and officials agree that a solution must be found to stop the increasing debt. The possibility of pension cuts as a solution is currently hotly debated.

USA Today writes more on the topic:

“That doesn’t mean that all debt is equal. We’ve never said that pensions should be made senior to all debt,” [Lew] said. “But there does have to be a balancing — and at the end of the day you’re going to need to have a functioning economy.”

Puerto Rico — a U.S. territory with 3.5 million residents who are born as American citizens — has accumulated more than $70 billion in bond debt and more than $40 billion in unfunded pension liabilities, according to Treasury’s recent estimate.

[…]

A fiscal oversight board should be formed and given “the discretion to make the trade-off decisions,” Lew said.

But, he added, “the efforts to try to protect any of the interests to the exclusion of all of the others are problematic.”

[…]

Some Republicans have pushed for pension adjustments as part of a restructuring package being considered by Congress, but many Democrats have largely opposed the concept, pushing instead for protections for union interests.

But Lew did not rule out reductions.

“There’s going to have to be a balancing of the interest of creditors and those who get retirement benefits and other bills that the commonwealth has to pay,” Lew said. “If the test is, creditors get paid 100% before anyone else gets paid anything, there’s not going to be a functioning Puerto Rico.”

Puerto Rico Governor Alejandro Garcia Padilla recently declined the concept of pension cuts for the sake of combating debt. He stated that the option would be unconstitutional.