For the second time in the last week, Puerto Rico’s credit ratings have been under scrutiny by stateside agencies. This time, it was Standard & Poor’s Ratings Services, which revised its outlook on the Commonwealth Employees Retirement System’s $2.9 billion in senior pension funding bonds, series A, B, and C to “negative” from “stable.”
The agency based its decision of the ability of Puerto Rico’s participating employers including, the commonwealth itself, 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 Retirement System’s bonds mirror its rating and outlook on Puerto Rico’s (BBB/Negative) 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 Standard & Poor’s 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 beleaguered Retirement System bonds even without a corresponding downgrade on the commonwealth appropriation 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,” Aldrete-Sánchez said.
Other factors that support S&P’s ratings include the system’s large pool of participating employers, including government agencies, most public corporations, and municipalities; long track record of receiving employer contributions at a rate that has not been reduced since 1960; statutory mandate by employers to appropriate the 11.275 percent contribution rate.
Those contributions, however, are subject to appropriation by the participating employers, and adequate annual debt service coverage through fiscal 2027, which S&P believes could increase as a result of the passage of Law 116 of 2011, which requires annual increases of 1 percent to the employer contribution starting in fiscal 2012 through fiscal 2016, with additional annual increases of 1.25 percent until employer contributions reach 20.5 percent of payroll in fiscal 2021.
“The increase in employer contributions has been responsibly integrated into the central government’s budgets over the last two years,” said Office of Management and Budget Executive Director Juan Carlos Pavía. “We managed to incorporate those increases, even while we were reducing the $3.3 billion deficit inherited in 2009 to $333 million for fiscal 2013.”
The precarious situation of the Retirement Systems has been a big problem for Puerto Rico over the past 20 years.
“The current administration has been the only administration in the last 10 years to implement measures to extend the life of the System’s assets,” Government Development Bank President Juan Carlos Batlle said.
S&P’s decision Thursday follows another downgrade handed down by Moody’s Investor Services last week, when it cut the Puerto Rico Sales and Use Tax Financing Corporation’s bond rating.