* State employee contributions to be raised to 10 pct
* Officials proposing to freeze defined contributions
SAN JUAN, April 3 Lawmakers in Puerto Rico are
expected to approve legislation on Thursday to reform a woefully
unfunded public pension system that risks to run out of money in
A major issuer in the $3.7 trillion U.S. municipal bond
market, Puerto Rico has seen its credit rating downgraded to
near-junk status amid Wall Street's concerns about the
cash-strapped finances of the Caribbean island.
Any further drop in its ratings to below investment grade
could lead investors to sell Puerto Rican bonds, which are
widely held because their interest payments are exempt from
federal, state and local taxes.
With government pension funds facing a combined unfunded
liability of $37.3 billion, Puerto Rico is under pressure to
show it is taking steps to narrow its budget deficit, estimated
to reach $2 billion this year, to avoid potential downgrades.
In a marathon session that began Monday and stretched into
early Tuesday, lawmakers in the House and Senate passed separate
versions of a bill to overhaul the state pension system but
agreed to a single bill that Gov. Alejandro Garcia Padilla is
expected to sign into law later this week.
Puerto Rico has already 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.
Under the proposed reform, state employee contributions
would be raised to 10 percent from 8.275 percent.
Christmas and summer bonuses for pensioners would be reduced
or eliminated for workers and the retirement ages for public
workers would be increased.
The proposed pension changes will help keep the system,
which is expected to run out of money by 2018, afloat until
about 2040, officials say, when the system self-corrects because
of the end of the defined benefits for employees hired
The government originally estimated it would need to spend
an additional $100 million annually on top of the changes to
salvage the system and officials say a larger contribution will
now be needed since some of the cuts originally proposed have
been scaled back.
David Jacobson, a spokesman for Moody's Investor's Service,
said the ratings agency would wait until the final legislation
was approved to analyze the potential impact of the reforms.
Last month, top Puerto Rico government officials told Wall
Street investors they were evaluating new tax hikes and other
measures to increase annual revenue by more than $1 billion.
Among analysts there are concerns the tax increase might
weigh on an economy that is finally showing some tepid
improvements. The island's jobless rate still remains at 14.6
percent down from a recession peak at 16.9 percent in May 2010.
In a private meeting with investors, the officials said they
wanted revenue to total $9.7 billion during fiscal year 2014,
which begins July 1, and that tax hikes programmed under the
previous administration would be scrapped.
They cautioned that the proposals were part of the budget
process and subject to change. Garcia Padilla is expected to
present his budget before the end of this month.
The government hopes to raise $550 million by eliminating
deductions and expanding the base of the sales & use tax,
according to Government Development Bank (GDB) officials.
Much of this increase would be made through the elimination
of a reseller's exemption certificate, which allows business
owners to skip paying the tax for items they purchase and use in
products that they sell.
To combat the widespread abuse of the system, the government
is proposing the elimination of the certificates and to refund
the merchants through tax credits.
An additional $490 million would be raised through new taxes
and revenue measures, according to the GDB.
On Tuesday, Garcia Padilla lashed out at Wall Street credit
ratings agencies, which have placed Puerto Rico's credit rating
on negative watch for potential downgrades.
"I disagree with them and believe they are treating Puerto
Rico unjustly," he said during a visit to the southwest coastal
town of Guancia.
"I am taking the decisions I have to take to save Puerto
Rico's credit so that Puerto Rico can move forward, not because
they asked me, but because Puerto Rico deserves highways,
hospitals and schools."