Puerto Rico Set to Boost Worst-Funded Pension Sans Debt
Puerto Rican lawmakers must beef up the government’s underfunded pension, which has less than 7 percent of needed assets, and may get their chance by next week, according to a legislative leader.
A bill to raise contributions and cut some payments may be submitted by Governor Alejandro Garcia Padilla, 41, before the end of next week, said Representative Rafael Hernandez, the Treasury Committee chairman in House of Representatives. Another bill would tap the local gaming industry for funds, he said, while there are no plans to use debt to put cash in the pension.
To show the three U.S. credit-rating companies “that we are serious about fixing the problem and we’re going to do something real, not just cosmetic,” Garcia Padilla must act before month’s end, Hernandez said yesterday. He said the measures will boost funding for the $1.7 billion pension system without selling bonds, a tactic used in the past.
“There is no time to lose and the governor is acutely aware,” Javier Ferrer, president of the Government Development Bank for Puerto Rico, the island’s fiscal agent, said by telephone from San Juan. He wouldn’t say when the governor will submit his plan, only that it would be unveiled “shortly.”
Puerto Rico’s retirement system had 6.8 percent of the assets needed to cover $25.5 billion in projected obligations to current and future retirees, according to the most recent actuarial report. By comparison, Illinois had about 43 percent of needed assets, the lowest funding ratio among states, data compiled by Bloomberg show. U.S. public pensions have a collective deficit estimated to be as much as $3.6 trillion.
The commonwealth must make changes in its pension system before it can borrow more money, Ferrer said. Jesus Manuel Ortiz, a spokesman for Garcia Padilla, referred inquiries about the pension, which covers more than 200,000 workers and retirees, to Ferrer, an appointee of the governor.
Puerto Rico had almost $3 billion of pension-obligation bonds and $9.8 billion of general-obligation debt as of March 31, 2012, according to the commonwealth. Hernandez and Ferrer both said there are no plans to sell more pension debt.
“Absolutely not,” Ferrer said when asked about such a sale. “We won’t be issuing POBs as a solution to the crisis.”
The commonwealth needs to reduce its obligations rather than taking on more debt, said Hernandez, a member of the governor’s Popular Democratic Party. Elected last year, Garcia Padilla took office Jan. 2.
“We owe so much money so the solution can’t be borrowing more,” Hernandez said. “It can’t be that.”
Fitch Ratings may cut Puerto Rico’s BBB+ rating, the third- lowest investment grade, according to a report yesterday from the credit-scoring company. The commonwealth’s deficit for the fiscal year ending in June “appears to be well above the $1.1 billion originally forecast,” Karen Krop, a Fitch analyst, said in the report.
Fitch put Puerto Rico’s debt on watch for a possible downgrade and may act early next month, following meetings with commonwealth officials, Krop said in the report.
Moody’s Investors Service rates Puerto Rico Baa3, its lowest investment grade, and gives the island a negative outlook. Standard & Poor’s has the commonwealth one level higher at BBB, also with a negative outlook.
A Puerto Rico general-obligation bond maturing in July 2041 traded Feb. 20 with an average yield of 5.09 percent, 2.1 percentage points higher than a benchmark index, data compiled by Bloomberg show. That yield difference was 2 percentage points when the bonds first priced March 7, 2012.
The pension legislation will include two bills that would produce a combined $300 million of savings and additional revenue each year, Hernandez said.
One measure would boost employee contributions to the system to about 10 percent and possibly increase the retirement age or the length of service needed to qualify for retirement, he said. Another change would reduce summer and holiday bonuses for lower-income retirees and eliminate them for those with higher incomes, he said.
Another measure would focus on raising new revenue from the commonwealth’s gaming industry. There are slot machines in restaurants and bars that aren’t regulated as casino slots are, Hernandez said.
“We’re looking at the whole gambling system of the island, the casinos, the lottery,” he said. Hernandez also cited “an underground market” of slot machines that don’t produce revenue for the commonwealth.
Ferrer declined to confirm the $300 million of potential savings and added contributions, changes in retirement rules and payments or the projected additional revenue from gaming.
“This is a key item that needs to be solved to address Puerto Rico’s fiscal situation,” Ferrer said. “There are no easy solutions given the condition of the retirement system.”
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