“The following is excerpted with
permission from the National Council on Teacher Retirement (NCTR) e-newsletter NCTR FYI”:
Puerto Rico Bill Set
to Advance in Senate
The
Senate appears poised to take up the recently-passed House version of an
assistance package for Puerto Rico before the end of this week, when the island
is confronted with $2 billion in debt payments due. U.S. Treasury
Secretary Jack Lew has warned that in the event of default, and if creditor lawsuits
are successful, “a judge could immediately order Puerto Rico to pay
creditors over essential services such as health, education, and public safety,” forcing
the Commonwealth “to lay off police officers, shut down public transit, or
close a hospital.”
Senate
Majority Leader Mitch McConnell (R-KY) has scheduled a cloture vote tomorrow, Wednesday
June 29th, on H.R. 5278, the Puerto Rico Oversight, Management, and Economic
Stability Act (PROMESA), that the House of Representatives adopted on June 9th by
a bipartisan vote of 297-127. The bill did not include any language
imposing a version of the Public Employee Pension Transparency Act (PEPTA) that
Congressman Devin Nunes (R-CA) introduced earlier this year on the nation’s
governmental retirement systems; and with the impending Senate cloture vote, it
appears increasingly unlikely that an attempt will be made to add a PEPTA
provision in the Senate.
In
order to invoke cloture, the support of three-fifths of the whole number of
Senators (sixty if there are no vacancies, as is currently the case) is
required. If successful, a cloture vote would limit debate on the
legislation to 30 hours, thereby ensuring a vote on final passage prior to the Friday
deadline. Cloture would also limit the number and nature of
amendments that would be allowed to be offered.
Thus,
in order to obtain cloture, every one of the 54 GOP Senators would have to
approve, as well as six additional Democrats. Then, in order to
avoid sending the legislation back to the House—which would ensure that the Friday
deadline would be missed—the bill would have to be adopted without amendment.
While
there are Senators of both parties who are not happy with H.R. 5278, and who
want to be able to offer amendments, it appears increasingly likely that there
is sufficient support for simply adopting the House-passed bill and sending it
to the President, who has said he would sign it. For example,
Senator Bill Nelson (D-FL) has now urged his colleagues to back the
House-passed Puerto Rico legislation, calling it “the only bill that we have
before us that could get by the Tea Party element in the House.”
In
a statement on the Senate floor on Monday, June 27th, Nelson said that “[w]e’re
out of time,” that the Senate needs to act, and that the House-passed bill “is
the only bill moving.” Nelson is the first Democrat to indicate that
he would support the House bill as-is, and comments from Senator Chuck Schumer
(D-NY), the anointed heir to current Senate Democratic leader Harry Reid
(D-NV), suggest that if Senate Republicans fall in line in support of the
measure, then Democrats will not block the bill from passing.
While
attempts to add unrelated public pension provisions such as PEPTA appear to
have been successfully thwarted—knock on wood!—the Puerto Rico legislation is
still viewed by some as a template for future Congressional action to “bail
out” public pension plans in other states. For example, Ike Brannon,
a visiting fellow with the Cato Institute, recently wrote a piece for The
Hill entitled “How the Puerto Rico Rescue Makes State Pensioners the
Big Winner.”
(This
is a significant piece for several reasons. First, the Cato
Institute is a libertarian Washington, DC, think tank originally founded as the
Charles Koch Foundation in 1974. In addition to its broad anti-tax
policies, the Cato Institute was one of the first to advocate for the
privatization of Social Security, and also opposes public schools, arguing that
the country should “break up the long-standing government monopoly” and move
“toward a competitive education market.” Brannon himself has a
substantial resume, having served as the chief economist for the Republican
Policy Committee, senior adviser for tax policy at the U.S. Treasury, principal
economic adviser for Senator Orrin Hatch (R-UT) on the Senate Finance
Committee, chief economist for the Congressional Joint Economic Committee, and
chief economist for the John McCain presidential campaign in
2008. Finally, The Hill has the largest circulation of any Capitol
Hill publication, with more than 24,000 print readers.)
In
this article, Brannon’s views with regard to the state of public pensions can
best be derived from this quote: “The prospect of states having to pay
their large baby boomer cohort pensions that can exceed $100,000 a year per
retiree for the remaining 30 or 40 years of their lives is a daunting tab.”
He
then goes on to note that in some states with the most serious funding
problems, such as Illinois, it is
often not possible to reduce pension benefits due to state constitutional
protections, and the level of tax increases necessary to fully fund the state pension
funds would take “a New Jersey–style personal income tax system, where everyone
is paying more money than they are now and the wealthy are paying a lot more,
like in the ballpark of 10 percent.” And, he observes, “The second
that taxpayers realized their tax rates had doubled or tripled solely to pay
for the generous pensions of state employees that dwarf their own, riots will
ensue.”
Therefore,
Brannon argues that the “political path of least resistance is to make the
hedge funds and other investors” who lent to states such as Illinois pay for
the state’s pension shortfall. Furthermore, he insists, the Puerto Rico
solution being devised by Congress “provides a viable path to make that
happen.”
According
to Brannon, while Puerto Rico was not supposed to be eligible for bankruptcy,
“the legislation before Congress will allow the territory to reduce its debt,
both general-obligation and non-general-obligation debt.” “If the bill
does become law,” he explains, “the island will promptly cease making payments
to its bondholders for the indefinite future,” and, since the bill also stays
creditor lawsuits, Puerto Rico will proceed to “use the funds freed up by
stiffing the creditors to hire more workers, build infrastructure and put money
into its nearly bankrupt pension fund.” And when these stays are
lifted, the Puerto Rican government “can pull out its pockets and plead poverty
and any creditor that lost money during the stay will likely be out of luck.”
“This
is the blueprint Illinois will almost surely follow,” Brannon insists, with the
state asking that Congress extend it some sort
of “bankruptcy” protection. Congress will be presented
with a choice that he describes as either protecting “the evil vulture funds
from Wall Street that lent [Illinois] money,” or “the hardworking state
employees who just want the pension promised to them.”
“The
safe bet is that before too long, Illinois will be allowed to stiff its
creditors at a propitious moment—not before trashing them [as] avaricious or
immoral, no doubt—and their pensioners will be held harmless, too,” Brannon
concludes. “And before too long, the next state will take its cue
from Illinois, and the pattern will be set, if not by law then by custom:
State employees on a defined benefit pension will always come before
investors who foolishly lent money to their state,” he warns, and “no one will
care one whit if that money represents the retirement funds of other U.S.
citizens, either.”
The
result? Brannon says that investors will stop treating the muni
market as being “a safe bet,” and “the borrowing rates for townships and cities
and parks will reflect the new reality of caveat creditor.” “Left on
the hook will be the taxpayer, whose governments will pay sharply higher
interest rates going forward,” he concludes.
This
line of reasoning has been presented previously, but perhaps not quite so
well-articulated by quite so influential a voice in certain
circles. As Brannon said in an earlier piece in The Hill,
“Like it or not, what we do in Puerto Rico sets a precedent that the market
will assume will be followed to absolve future government insolvencies, and
setting aside an explicit constitutional promise to general obligation
bondholders will have repercussions.”
“Pretending
otherwise is absurd,” Brannon warned, and there are those who think he is
right—and that Congress should therefore take pre-emptive action when it comes
to public pension plans’ finances. In short, while public pensions
will hopefully have won the battle this time around with regard to PEPTA, there
is every reason to believe that the larger war will continue, in Congress and
in state legislatures.
