SAN JUAN Puerto Rico Governor Alejandro Garcia Padilla has signed an overhaul of the U.S. territory's cash-short public pension fund into law, after it was passed by lawmakers late on Thursday in a bid to soothe investors and shore up the country's sputtering economy.
"This has not been a simple process," Garcia Padilla said as he enacted the legislation on Thursday night that had been bitterly opposed by labor unions.
"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 governor said.
Officials said the overhaul, of the notoriously weak and underfunded public pension system, was a crucial step to avoid a potentially devastating credit downgrade.
"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 Caribbean island's legislature.
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 as the island struggles to emerge from a five-year recession that has pushed unemployment to nearly 15 percent.
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.
The new pension law will raise the retirement age for some state workers, increase worker pensions contributions and lower monthly pensions and benefits for some public workers.
It will also reduce state workers' Christmas bonuses and eliminate summer bonus payments.
Although the municipal bond market could show some positive reaction to the pension reform news, Puerto Rico's yields were already the highest of any borrower in the U.S. municipal bond market.
On Thursday, Puerto Rico's 10-year yield spread over triple A bonds ended at a four-year high of 310 basis points, unchanged from Wednesday, 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.
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.
To help narrow the budget deficit, top Puerto Rico government officials say they are evaluating tax increases 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, however.