Moody’s Investors Service downgraded the rating of more than $1 billion of the Puerto Rico Public Building Authority’s general obligation bonds to Baa1 from A3, providing a negative outlook for Series R and Series S. The bonds are expected to go to market Tuesday.
While the PBA’s Series R bonds, which are to be used for school construction projects, are expected to be sold for up to $756 million, its revenue refunding Series S bonds, could sell for up to $308.5 million.
As expected, Moody’s attributed its decision to downgrade to the weak fiscal health of the Commonwealth Retirement System.
“The downgrade to Baa1 and the assignment of a negative outlook reflect the commonwealth’s continued financial deterioration of the severely underfunded retirement systems, continued weak economic trend, and weak finances, with a historical trend of funding budget gaps with borrowing,” Moody’s said in its report. “Needed retirement system reforms, in our view, may exacerbate strains on the commonwealth’s economy and budgetary finances in the coming years.”
Currently, the government’s pension plans are dragging an unfunded liability of $25 billion and $42 billion in debt, which “together represent roughly seven times the annual budget, a combined burden that will exert significant budgetary pressure for many years to come.”
Moody’s announcement drew immediate reaction from Gov. Luis Fortuño administration officials, who called a news conference to discuss the steps taken to address the problem.
“We’ve made headway in our fiscal situation, but there’s work to be done,” said Government Development Bank President Juan Carlos Batlle. “We have been clear at all times. We can’t solve a problem like this overnight.”
Ironically, the announcement came just two days after Fortuño himself was touting the island’s ability to avoid a downgrade, as opposed to the U.S. government.
Batlle is slated to lead a meeting with the other key credit ratings agency, Standard & Poor’s Friday, ahead of any possible reclassification.
Monday’s downgrade pulled down the value of local stocks listed on Wall Street, all of which reflected significant drops at the end of business. Banco Popular, Triple-S and FirstBank took the biggest tumbles, with drops of 13.9 percent, 10.3 percent and 11.4 percent, respectively.
Retirement Systems slash loan limits
Meanwhile, Moody’s decision also triggered Retirement Systems Administrator Héctor Mayol to announce the agency has put several measures in place “to protect pensions and benefits to beneficiaries” that include reducing the amount of personal loans to $5,000 from $15,000 and for cultural trips to $5,000 from $10,000. The first types of loans “have significantly eroded the agency’s liquidity.”
In addition, the renewal period for personal loans will be extended from 12 to 24 months and cultural trip loans will not be renewed until they are paid off.
“We must do everything in our power to protect our pensioners’ benefits. The approval of the new borrowing parameters joins the legislative measures passed n July that increase the contribution required from Retirement System member employers,” Mayol said. “We expects these measures will help overcome the financial crisis the reitrement systems and are facing, which have caused … Moody’s Investor to make its adjustment.”