Puerto Rico proposes overhaul of shaky public pensions

Wed Feb 27, 2013 9:47pm EST

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* Government faces unfunded liabilities of $37.3 billion

* Measure will be submitted to legislature this week

Feb 27 (Reuters) - Puerto Rico's new government on Wednesday proposed raising retirement ages, increasing worker contributions and other changes to a wobbly public pension system that officials hope will help stave off bond downgrades.

Puerto Rico, whose government pension plans have unfunded liabilities of $37.3 billion, had $38 billion of its debt downgraded in December to near-junk status by Moody's Investors Service.

Moody's and other credit agencies, whose ratings heavily influence interest levels in America's $3.7 trillion municipal bond market, say the Caribbean island needs to bolster its pension systems and return to structurally balanced budgets.

Its economy only showing tentative signs of emerging from a six-year recession, Puerto Rico pays the highest rates of any big tax-free issuer.

The proposed pension overhaul, to be submitted to the U.S. commonwealth's legislature this week, would increase employee contributions to 10 percent from 8.275 percent.

The retirement age would rise to 65 years from 58 years for employees in some categories, and to 67 from 60 in others. The retirement age for police and firefighters would jump to 58 from 50.

It also would cut back benefits to government retirees, such as seasonal bonuses and money to cover medical benefits.

It is likely to pass despite expected opposition in the legislature controlled by Governor Alejandro Garcia Padilla's Popular Democratic Party.

Puerto Rico has ended defined benefit pensions for employees hired after 2000. Officials are proposing that defined benefits currently enjoyed by employees be frozen as of June 30, and those workers be moved into a defined contribution plan.

MORE REVENUES NEEDED

Beyond these measures, additional revenues of more than $100 million annually must be found to invest in the system over the next several decades, said Treasury Secretary Melba Acosta.

Acosta is analyzing revenue-raising alternatives as part of drawing up a budget for the fiscal year beginning July 1. Possible measures include tightening up compliance and eliminating exemptions to a sales and use tax.

The government is also looking at unspecified possible new taxes.

Acosta said the additional revenue is on top of the stepped-up government contribution enacted in 2011, which increased the government's contribution of 9.275 percent of an employee's salary, by a full percentage point a year for next five years.

After that, the contribution would shoot up by an additional 1.25 percentage points each year for another five years.

The bonus changes will save an estimated $100 million annually, and Retirement System Administrator Hector Mayol said he expects the pension funds' unfunded liability to decrease substantially.

While the pension system was slated to run out of cash by 2018, the changes will keep the system afloat until about 2040, as the system self-corrects as defined benefits for employees hired after 2000 end, according officials.

Government Development Bank President Javier Ferrer has said that the pension fix was essential to preserving Puerto Rico's credit rating and allowing the government to return to the bond markets before the June 30 close of the fiscal year.

Moody's rates Puerto Rico debt as one notch above a junk-bond rating. Standard & Poor's (S&P) rates Puerto Rico's general-obligation bonds BBB, which is only two notches above junk-bond status. But the rating is under a negative outlook, which means a downgrade could be on the horizon. Fitch Ratings rates Puerto Rico BBB-plus, which is three notches above non-investment grade.

Finance officials in San Juan said they would discuss the proposed reforms with Wall Street credit-agency analysts in coming days.

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Comments (1)
eatingdogfood wrote:
Isn’t It Time For The Abused Taxpayers Of Puerto Rico To Leave In Masses In Order To End This Unholy Conspiracy Between The Totally Corrupt Democrats And The Equally Corrupt Public Service Unions? It Is Really The Only Way To Finally End This Criminal Activity! Did Anybody Ever Hear Of RICO?

Feb 28, 2013 6:54pm EST  --  Report as abuse
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