Fitch deems Puerto Rico’s pension reform ‘positive step’

Written by  //  April 9, 2013  //  Economy  //  No comments

Print Friendly, PDF & Email
Fitch noted Puerto Rico continues to “face several challenges including a very large structural budget gap that is unlikely to be resolved before fiscal 2015.

Fitch noted Puerto Rico continues to “face several challenges including a very large structural budget gap that is unlikely to be resolved before fiscal 2015.

Fitch Ratings officials said Monday the pension reforms that the Puerto Rican government has enacted are “positive and an important step toward achieving credit stability.”

However, the New York-based agency noted that despite overhauling the cash-strapped Commonwealth Retirement Systems through a law signed last week, the changes would still require the government to increase its annual payments to the fund.

The reforms, Fitch said, aim to reduce future cash flow deficits in the plan both by increasing payments into the plan and reducing future cash payments out of the plan.

“The legislation converts the current defined benefit plan into a hybrid defined benefit/defined contribution plan, and, among other provisions, raises employee contributions, increases the retirement age, and reduces future benefit payments. Even with these changes, the commonwealth will have to increase its annual payments to the fund,” Fitch said.

Furthermore, the agency noted Puerto Rico continues to “face several challenges including a very large structural budget gap that is unlikely to be resolved before fiscal 2015.”

Fitch’s comments come on the heels of a similar opinion issued by Standard & Poor’s last week. In its assessment, Fitch said the current fiscal year’s economic and revenue underperformance “have meaningfully increased the size of the fiscal 2013 operating imbalance and widened the gap the commonwealth must address in its upcoming budget deliberations.”

While Fitch does not expect the fiscal 2014 budget to be structurally balanced, the rating assumes substantial progress toward structural balance. Still, it is keeping the ‘BBB-‘ rating with a negative outlook on Puerto Rico’s general obligation general obligations bonds in place.

Last Friday, Standard & Poor’s Ratings Services was the first to come out of the gate with a reaction to the pension reform, calling it a “positive credit development that could significantly reduce a source of budgetary and cash-flow pressure for the central government and its agencies.”

“While we have not had an opportunity to review the approved legislation and resulting actuarial projections in detail, we understand that the reform will, among other measures, raise the minimum retirement age for some groups of  public employees and police and fire personnel, increase the employee  contribution to the retirement system by nearly 2 percent, and reduce monthly  benefits for some employees.”

Furthermore, the agency said it believed the enacted reform bill preserves one of the key elements from the governor’s original  proposal: shifting the majority of public employees from their current defined-benefit plan to a hybrid plan that includes a defined-contribution component.

“We expect that the approved pension reform will significantly reduce the additional pay-as-you-go contribution from the commonwealth to the retirement system,” S&P said. “While we recognize the considerable impact this pension reform could have on reducing one of the most meaningful sources of long-term budgetary and cash-flow pressures for the commonwealth, 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.”

Leave a Comment

comm comm comm