S&P cuts outlook on PR pension system

S&P said the lower outlook was based on its opinion of the ability of the leading participating employers to continue to make their required contributions to the system in full and on a timely basis. At the same time, Standard & Poor’s affirmed its ‘BBB-’ rating on the bonds.

S&P’s current rating and outlook on the ERS bonds mirror its rating and outlook on Puerto Rico’s (BBB-) appropriation debt.

“However, we believe that the commonwealth’s fiscal and budgetary challenges, including the independent actuary’s projected depletion of the retirement fund’s gross assets by fiscal 2019, could limit the commonwealth’s ability and willingness to provide the timely contributions that will be required to maintain an adequate debt service coverage on the ERS bonds,” said S&P credit analyst Horacio Aldrete-Sánchez.

Puerto Rico’s failure to adopt comprehensive measures to address its unfunded pension liability within the next year could result in a downgrade on the ERS bonds even without a corresponding downgrade on the commonwealth’s general obligation (GO) bond rating, S&P said.

“While we recognize that the adopted multiyear increases to the employers’ required contribution could result in higher annual debt service coverage on the bonds, we believe that the timely adoption of these increases will remain uncertain due to the commonwealth’s fiscal and budgetary challenges,” S&P said.

“They don’t say it explicitly, but by the end of fiscal year 2013 [June 30, 2013], S&P expects structural balance and something to be done with the pension plan,” Sergio Marxuach, public policy director at the Center for the New Economy, told CARIBBEAN BUSINESS.

The administration of Gov. Luis Fortuño has pledged to take additional action on the pension problem by year’s end and said all options remained on the table.

The Puerto Rico Employees Retirement System has an unfunded liability of $17.8 billion. Combined with other public pension systems, the commonwealth’s unfunded liability balloons to $24 billion.

Fortuño reconvened the legislative leadership of both major political parties to create a working group of experts representing the legislative and executive branches to address the critical financial situation of the ERS. He said he expects its final recommendations by Nov. 15, after the local elections, so they may be enacted into law at the beginning of the next legislative session in January.

Some legislation has already been adopted during this term to start addressing the situation and extend the life of the pension systems.

Law 116 of 2011 increased employer contributions to the ERS from 9.275% to 10.275%, starting July 1, 2011, with an additional annual increase of 1% of the remuneration regularly received by participants of the ERS beginning July 1 and continuing through June 30, 2016.

Meanwhile, Law 114 of 2011 provided for an increase in the employer contribution to the Teachers Retirement System (TRS), from 8.5% to 9.5% from July 1, 2011, with an additional annual increase of 1% commencing in July 2012 through June 2016.

In addition, both laws provide, beginning in 2016 through June 30, 2021, an annual increase of 1.25% in the employer contribution will be received by each system.

Law 96 of 2011 injected $162.5 million in the form of a capital appreciation bond into the ERS, which after 40 years will accrue to more than $1.5 billion to help fund the ERS deficit.

Meanwhile, the ERS board and officials of the ailing Judiciary Retirement System approved a new regulation to reinstate the $5,000 limitation on personal loans and continuing education-related expenses that, according to actuarial studies, have been helping erode the liquidity of the retirement systems since 2007.

Last month, S&P revised its outlook on outstanding Puerto Rico GO bonds and appropriation debt to “negative” from “stable,” citing a “challenging economic and fiscal environment, which has the potential to delay a transition to structurally balanced budgets beyond fiscal 2013.” S&P said it was “critical” for the government to transition to structurally balanced budgets after fiscal 2013 and also to do more to shore up the finances of the government’s pension funds.

While S&P gives Puerto Rico its BBB rating, Fitch rates Puerto Rico’s credit at BBB+ with a stable outlook and Moody’s Investors Service a Baa1 with a negative outlook.