You get an idea how the struggle between bondholders and pensions quickly turns into a political nightmare, as reported in the WSJ:
San Juan, Puerto Rico—One of the thorniest tasks awaiting a seven-member board charged by Washington with cleaning up Puerto Rico’s debt crisis is deciding how to balance a $70 billion debt load with nearly $43 billion in unfunded pension liabilities.
The issue is coming to a head now because the White House is set to name as soon as next week the members of that oversight board, drawn from lists of candidates submitted by congressional leaders in both parties.
Puerto Rico’s constitution calls for the island to pay its general-obligation bonds ahead of public services or pensions, but a law signed by President Barack Obama in June clouds that hierarchy by directing the new board to ensure pensions are adequately funded.
For the oversight board, “there are no good options here,” said Matt Fabian, a partner at research firm Municipal Market Analytics. Cutting payouts to debtholders ahead of pensions will inflame creditors, but cutting pension payments to plan members could accelerate the migration and economic decline that the oversight board is tasked with stemming.
Creditors fired a pre-emptive volley last month when they sued the island’s government in federal court after it passed a budget that increases funding for pensions without setting aside money for debt payment. The budget diverts “vast resources to purposes that apparently enjoy political favor but are indisputably junior to constitutional debt,” the complaint said.