The Teachers Mutiny

T’was the week before Christmas and…

“…we had a coup d’état,” in the words of Jaime.

Who should know, being a lawyer and an astute observer. So what happened? Well, the governor of the island called a special session of the legislature to pass a “reform” of the teachers’ retirement system, which currently has almost 40,000 pensioners. This follows a move in April to reform the government workers retirement system, which caused protests across the island.

It’s not the chickens but rather the eagles come home to roost; since 1952, governments have had two or three essential strategies to reduce unemployment. The first was legitimate—manufacturing, especially pharmaceuticals. That Valium you mother chugged down to tide her through your terrible twos? Thanks, Puerto Rico!

The other modes were a little less kosher….

“He shipped ‘em all off to New York!” sputtered Mr. Fernández, when someone suggested that Luis Muñoz Marín—a close relative of the devil, in the eyes of Mr. Fernández—had reduced unemployment.

The other solution? Put everybody on the government payroll, give them one task to do, and pay them substantially less than the private sector. So you had an enormous government; if memory serves... well wait. Here’s a graphic:

So everybody knew for years that we were heading for disaster. And thus the last governor passed legislation that slashed 30,000 government jobs. Last April, the present governor took the machete to the government retirement system and raised taxes. And now, it’s the teachers’ turn.

There are two reasons for this. First, the system is broke; here’s what the president of the Senate, Eduardo Bhatia, had to say:

To have a retirement system you have to square the end of the month and it is broken. For every dollar you have to give a person who retires today there are 17 cents in the piggy bank. The question is where the other 83 cents go, and that is the decision we have to make as a country. Are there additional 83 cents in the General Fund? No, not there,’ said the Senate leader.

Put it another way—the norm is to have a plan 80% funded, we are only at 17%.

The other factor at play? A little company called Moody’s, which has our credit rating one notch above junk, and is watching Puerto Rico closely.

Well, “watching” may be generous. Moody’s, in fact, has Puerto Rico quite securely by part of a gentleman’s most prized anatomical possessions. And Cate Long, writing for Reuters states it openly: she wrote, “Moody’s identified this reform as one of the factors that will compose its review of Puerto Rico.”

So what happened? The governor sent legislation to one of the two teachers’ unions on the island, and they erupted. And as you can see in the video below, they not only protested but broke the doors to the Senate and charged in. So soon, the entire island was glued to their televisions, watching as hundreds of chanting teachers gathered in the capitol.

Damage? $55,000. One part of which may have been a senator’s chair, on which, according to The New Day, a child was permitted or possibly urged to urinate. Oh, and a security official got bitten, though the attacker didn’t draw blood.

And what did the Senate do? Well, they got the hell out of Dodge City, which in this case meant retreating into an adjacent room, the Hall for Illustrious Ladies. They continued the debate until seven PM, when they adjourned.

To make a sorry situation worse, the teachers do not receive Social Security, and so their pension is the only thing they have.

The reaction from the guv? He came out and called it “reproachable,” which seems a bit mild, given the damage done and the precedent it sets.

You can argue—the teachers should have seen it coming; it was clear that the system was unsustainable. It’s also true that we have a very expensive government, and that our legislators make a killing, both when they’re in office and when they come back as “advisers.” Nor does it help that—according to Mr. Fernández—the Department of Education has the highest proportion of non-docent versus docent personnel in the country.

The saddest thing? According to an analysis by Joanisabel González in the print edition of El Nuevo Día, “Lo increíble es que Puerto Rico entrará en esta nueva parte del ciclo sin garantías de que escapará a la degradación crediticia”.

Simple translation! Even if we do this—and the House has in the last hour just passed the legislation—it may not be enough.

As our Governors Fiddled

Ouch—I’ll give it to you first in Spanish, and then in English:

“Esto es de lo peor que he visto”, comentó Zamansky, quien ha visto todo tipo de casos, incluyendo el sonado caso de Bernard Madoff.

“This is the worst I’ve ever seen,” Zamansky commented, who has seen all kinds of cases, including the famous case of Bernard Madoff.

And what is Jake Zamansky, a security and investment fraud attorney, talking about? Well, the case of the Puerto Rican branch of UBS, which has been selling Puerto Rican bonds to its clients for years now.

And what’s wrong with that? Aren’t bonds supposed to be a safe investment?

It seems not—especially in the case of Puerto Rico, whose credit rating is one step above junk bond rating, and whose government is seriously broke. How seriously broke? Well, how serious is 70 billion bucks? Our pension program is 37.3 billion underfunded.

“Of course,” said my friend Tony, “that’s just a guess-timate. Because you know what? There’s no actuarial work or studies done on the plan….”

My years with Mr. Fernández have taught me about actuaries; they’re statisticians who predict how much money a plan will need based on the number of people in the plan, the age, expected life span, etc. And if you don’t have that info? You’re operating completely in the dark.

This caused the governor, last month, to scurry up to New York to tell Moody’s and the other credit rating houses that all was well on the island, and that he / they had raised taxes and had a solid, solid plan to deal with the mess.

Did they? Well, it’s true that they had raised taxes—but what had they not done? The one thing that would really bring howls: cut the size of the government.

They did, however, take on the retirement system, and high time, since one of the senators…well, let him speak for himself:

"No retirement system in the world is as broken as ours," Senate President Eduardo Bhatia said on Thursday, before the overhaul legislation was approved by both houses of the Caribbean island's legislature.

The overhaul was bitterly protested, and went to the local Supreme Court, which upheld it. So now the protests have died down, but it’s anybody’s guess when the money will run out….

Now then, into this gloomy picture—oh, and I have told you the unemployment rate is about 15% and the per capita household income is half that of the poorest state, haven’t I?—steps UBS, which is one of the three biggest brokerage houses on the island.

And because of a unique feature in the law, Puerto Rico bonds happen to be rather attractive, at least potentially. Why? Here’s Bloomberg—and who should know but they?—on the subject:

Interest on debt issued by Puerto Rican governments is typically tax-free across the U.S., and yields on some issues topped 10 percent in recent weeks amid doubt about whether investors will be repaid. The bonds’ high yields and tax-exempt status make them popular with retail investors, according to the statement.

Nice, hunh?

Not so nice, said the Commonwealth of Massachusetts Secretary William F. Gavin in the same Bloomberg article:

“Puerto Rico is currently on the verge of insolvency and many of its obligations are at or near junk rating,” according to the statement. “The risks associated with its municipal debt obligation are disproportionally high.”

‘Well,’ you are perhaps thinking, ‘let the rich suffer. I, for one, only have the shirt on my back, the roof over my head, and the rice and beans in my stomach. So, however bad the losses in the bond market may have been, it’s hardly my problem….’

Wish that were true. But first, you should know that the losses were 2.2 billion in the month of September alone. Nor is it just the wealthy affected.

In fact, here’s Zamansky again:

“He atendido por lo menos a 150 personas y escucho, esencialmente, lo mismo. Son retirados, personas que son inversionistas conservadores y que se le dijo que invirtieran todo o una gran parte de su dinero en estos fondos cerrados y en bonos de Puerto Rico”, sostuvo el abogado. “A más de la mitad de estas personas se les instó a que tomaran prestado”.

“I’ve taken care of at least 150 people and have heard, essentially, the same tyhing. They are retired, people who are conservative investors and were told to invest all or a great part of their money in these closed funds and bonds of Puerto Rico,” he stated. “And more than half of these people were told to take out a loan to do so.”

The problem? Was UBS informing these people of the risks of investing in Puerto Rico? No bond is guaranteed if the government goes broke. And the advisability of offering or urging a line of credit or a loan to investors?

The Government Will Decide Whether to Sue UBS—reads the headline in The New Day, our local paper.

In the meantime, Zamansky and other lawyers are sitting in hotels, interviewing hundreds of mostly middle class retirees, many of whom have suffered significant losses. How significant? Some people are so old that they’re in nursing homes, and now the families are having to take them out of them: there’s no money left.

The handwriting has been on the wall for a long time, of course. A few years back, a Reuter’s blog came out and said it bluntly: Puerto Rico is America’s Greece. If our folly and foolishness had hurt the rich, I might cheer. But the idea of hard-working, prudent, conservative people losing their life savings?

…heart breaking.