Puerto Rico pension overhaul due soon -finance official

Thu Feb 14, 2013 7:14pm EST

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Feb 14 (Reuters) - Puerto Rico's new governor will propose in coming weeks overhauls of the Caribbean island's severely underfunded public pension systems, which might set the stage for Puerto Rico bond sales, a top finance official said on Thursday.

A big seller of bonds in America's $3.7 trillion tax-free market, Puerto Rico pays the highest rates of any big issuer, partly because of a weak economy, chronic budget deficits and unfunded pension liabilities of $37.3 billion.

Gov. Alejandro Garcia Padilla is analyzing alternatives meant to bolster the finances of the government's pension funds, Government Development Bank President Javier Ferrer told reporters on Thursday.

"Puerto Rico will get a downgrade of our credit rating, if we do not act to resolve our fiscal situation," Ferrer said. "A downgrade to a junk rating will result in a chain of events that will have a significant impact to Puerto Rico. We are doing all we can to avoid that."

In December, in an action affecting $38 billion of debt, Moody's Investors Service slashed Puerto Rico's credit rating by two notches to Baa3, just slightly above non-investment grade, with a negative outlook.

Ferrer declined to discuss the pension alternatives, saying the governor would announce the plan shortly and reiterating the Puerto Rico government is ready to make tough decisions to get its financial house in order.

Once the pension reform, which will require legislation, is enacted, Ferrer said he hoped to return to the bond market this year.

The GDB will refinance general obligation issues to try to get better rates and put off some $700 million in interest payments this year.

The bank, which acts as the U.S. commonwealth's fiscal agent, also wants to take out $2 billion in interim financing it has with the Puerto Rico Highways and Transportation Authority, according to Ferrer.

The later issue will require not just pension reform but increased sources of revenue, Ferrer said. While toll hikes are under consideration, there are also other alternatives being analyzed, he added. The administration has already said it would raise water and electricity rates.

"It's on my wish list," Ferrer said, when asked whether the issue would go to market before the June 30 close of the current fiscal year.

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