Moody’s: Puerto Rico’s pension reform, IVU changes ‘credit positive’
Credit ratings agency Moody’s Investor Service issued a report Wednesday saying that Commonwealth employee retirement system (ERS, for short) reform and the projected changes to the sales and use tax system are both positives for the island’s credit, despite the ongoing fiscal indebtedness.
In its comments, Moody’s said “although the magnitude of the effect on the large accrued unfunded liability is uncertain, the reform is positive for the commonwealth, which faced rapidly approaching illiquidity of the retirement system without reforms.”
It also noted that the new pension law enacted April 4 does not affect the “large and strained” Teachers’ Retirement System. However, in its analysis, Moody’s conceded that new law “includes multiple components, which act together to stabilize the system.”
Meanwhile, the agency also noted the government’s strategy to address the fiscal budget gap, which will remain at $500 million at the end of June.
For fiscal 2014, Gov. Alejandro García-Padilla’s economic team is relying on increased sales tax (known as IVU for its initials in Spanish) revenues through broadening the taxing base to include business-to-business transactions, and includes a reduced but still large component of debt restructuring and deficit financing of $775 million.
“A number of measures in the budget may prove politically challenging, and what form the final budget will take after legislative debates is uncertain,” Moody’s noted. “The sales tax expansion, if it passes, it will be positive for both the commonwealth and the Puerto Rico Sales Tax Financing Authority (known by its Spanish acronym COFINA), although uncertainty will remain regarding the forecasted incremental revenue to be raised.”
“The credit impact of the fiscal 2013 budget measures is mixed. The budget fixes are virtually all of a non-recurring nature and there is still uncertainty around the remaining $495 million gap, although the new administration has acted quickly to address the revenue shortfall,” Moody’s noted.
And, the commonwealth has “demonstrated access to the capital market and can access additional financing” from the Government Development Bank, if necessary.
However, Moody’s said the weak financial position of some of the commonwealth’s public corporations and their reliance on the GDB for liquidity places additional risks and burdens on the commonwealth.
Moody’s has placed both the commonwealth and the GDB’s rating at “Baa3,” — one notch above junk — with a negative outlook.
To read the full report, click here.