UPDATE 2-Puerto Rico approves public pension system overhaul

Fri Apr 5, 2013 4:58pm EDT

SAN JUAN, April 5 (Reuters) - Puerto Rico's governor has signed an overhaul of the U.S. territory's cash-short public pension system that lawmakers passed in a bid to soothe investors and shore up the country's sputtering economy.

The new pension law passed late on Thursday will raise the retirement age for some state workers, increase worker contributions to the plan and lower monthly pensions and benefits for some public workers. It will also reduce state workers' Christmas bonuses and eliminate summer bonus payments.

Officials said the overhaul of the notoriously weak and underfunded system, bitterly opposed by labor unions, was a crucial step to avoid a potentially devastating credit downgrade that would drive up borrowing costs and further weaken pubic finances.

"This has not been a simple process," Governor Alejandro Garcia Padilla said as he enacted the legislation on Thursday night. "It has been a topic that has been avoided for the past 60 years. No administration has taken the responsibility of reforming the retirement system."

The government's main retirement fund faces an unfunded liability of more than $37 billion. The fund, which serves more than 200,000 current and retired government workers, is only about 7 percent funded and officials have warned it could run out of money by 2018.

"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 legislature.

The Caribbean island is a leading borrower in the $3.7 trillion U.S. municipal bond market. Any further downgrade by rating agencies would sharply increase the cost of borrowing for Puerto Rico, which needs to be able to issue bonds at attractive rates to meet pressing short-term financing needs.

On Friday, as yields fell, the 10-year yield spread between Puerto Rico and triple-A debt widened to 330 basis points from 310 basis points on Thursday, Municipal Market data showed.

The 10-year Puerto Rico yield spread hit a record high at 340 basis points in February 2009 during the financial crisis.

EASE SOME PRESSURE

Troy Willis, senior portfolio manager at OppenheimerFunds, said the reform should help ease some of the pressure on Puerto Rico's finances.

The reform "gives them a lot of extra breathing room to figure things out," he said.

All three major credit ratings firms have recently downgraded Puerto Rico's bond ratings to just above junk-bond status, pointing to widening budget deficits.

The island is struggling to emerge from a five-year recession. The unemployment rate in February was still at 14.5 percent down from nearly 17 percent in may 2010.

To help narrow the deficit, top government officials say they are evaluating tax rises and other measures to increase annual revenue by more than $1 billion. Tax noncompliance is one of the problems that have prompted comparisons between Puerto Rico and Greece.

Standard & Poor's Ratings Services, the credit ratings agency that has a BBB minus rating on Puerto Rico with a negative outlook, welcomed the pension reform in a statement on Friday, but said more needed to be done to address public finances.

"We believe that the impact of these measures on the commonwealth rating will largely be determined by the degree of progress Puerto Rico makes in eliminating its $2.1 billion structural general fund deficit," the agency said.

Karen Krop, senior director at Fitch Ratings, which held its BBB minus rating on Puerto Rico debt with a negative outlook, despite the pension reform, said the rating agency also wants to see Puerto Rico make more progress in closing its budget deficits.

"Getting structural balance is likely to take them more than one year," Krop told Reuters in a telephone interview.

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.