SAN JUAN, April 5 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
"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
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
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
"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
"Getting structural balance is likely to take them more than
one year," Krop told Reuters in a telephone interview.