SAN JUAN, April 4 Despite staunch opposition
from labor unions, senators in Puerto Rico passed a bill on
Thursday to overhaul the island's public pension system in what
could be a first step to soothe investor worries about the U.S.
territory's fiscal health.
Lawmakers in the House of Representatives were expected to
approve the bill later Thursday and Governor Alejandro Garcia
Padilla has said he plans to sign it into law.
The Caribbean island is a leading borrower in the $3.7
trillion U.S. municipal bond market and has seen its credit
rating downgraded to near-junk status because of chronic budget
deficits, raising concerns investors could unload its widely
The bill will raise the retirement age for some state
workers to age 65, increase worker pensions contributions by
nearly 2 percent and lower monthly pensions and benefits for
some public workers.
It will also reduce state workers' Christmas bonuses and
eliminate summer bonus payments.
"No retirement system in the world is as broken as ours,"
Senate President Eduardo Bhatia said as debate on the proposed
reform opened. "Doing nothing would be the most irresponsible
act to the people of Puerto Rico."
Senators voted 14-11 to approve the bill as hundreds of
angry public workers protested outside Puerto Rico's Capitol and
union leaders went on a last-minute push to persuade lawmakers
to vote against the proposed reform.
The pension overhaul is "good news" for Puerto Rico's
financial outlook but more needs to be done to convince
investors the worst is over, said Peter Hayes, head of the
municipal bonds group at BlackRock, with $109 billion in assets.
"We need to see some pretty meaningful reforms" before
increasing investment in Puerto Rico's debt, he said, adding
concerns remain over Puerto Rico's deficit, which has doubled to
YIELDS UNLIKELY TO FALL SOON
Although the municipal bond market could show some positive
reaction to the news, "the bias is toward widening more than
narrowing," said Sean Carney, the municipal strategist for
Puerto Rico's yields, which were already the highest of any
borrower in the U.S. municipal bond market, have risen in recent
weeks. 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.
Ahead of the vote, Garcia Padilla released a videotaped
speech anticipating its approval.
"Together, we have saved the future of thousands of men and
women who have built the future of our country. We have saved
all existing pensions," Garcia Padilla said.
All three major credit ratings firms have recently
downgraded Puerto Rico's bond ratings to just above junk-bond
status, pointing to its widening budget deficits as the island
struggles with a sputtering economy and a 14.6 percent
To help the island narrow the budget deficit, top Puerto
Rico government officials say they are evaluating new tax hikes
and other measures to increase annual revenue by more than $1