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1:04pm March 4, 2013

Puerto Rico Set for More Bitter Medicine with Pension Reform

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Despite Puerto Rico Governor Alejandro Garcia Padilla’s promise during his inauguration speech that the time for sour medicine had passed (alluding to former Governor Luis Fortuño’s austerity measures), Gov. Garcia-Padilla unveiled a set of strong measures to tackle the Island’s pension program. Reuter’s Cate Long described Puerto Rico’s pension crisis last year as:

“[t]he Puerto Rico pension fund for general employees was funded at 6.3 percent in 2011. Basically it’s almost out of money for its 113,000 retirees. There could be a huge backlash if retirees’ payments stop and bondholders are paid instead of them.”

Puerto Rico’s own figures, released last week, place the pension’s system asset-to-promise deficit at 35.6 billion dollars as of June of 2011, of which 25 billion apply solely to the Employee Retirement System (public teachers have their own separate pension program, which is also running a multi-billion dollar deficit). Additionally, the ERS’s bond rating had already been dropped to Baa3 (Negative outlook), further deepening the crisis faced by Puerto Rico and the ERS (given that Puerto Rico is heavily dependent on the municipal bond market for funding).

Faced with reality, Gov. Garcia Padilla, who during the campaign promised to increase retiree benefits and blasted then Gov. Fortuño’s proposal to cut benefits and raise the retirement age, had to do precisely what his predecessor did: administer some very bitter, but necessary, medicine. To properly rein in the ERS’s deficit, Gov. Garcia Padilla proposed:

1) A staggered increase in retirement age (depending on what retirement plan you had, retirement age could vary from 50 to 60, will now be raised to at least 65);

2) Increase in employee contribution from 8.2% to 10%;

3) Reduction of Christmas Bonus and elimination of “Summer Bonus”;

4) Increase the medical bonus in lower-income retirees while cutting it for higher-income retirees;

5) Reforming the benefit structure (i.e. making some plans into annuities);

6) And raising the minimum pension from $400.00 to $500.

While several municipal bond observers maintained cautious optimism with the reform,  others felt it did not go far enough. The Wall Street Journal’s article on the proposal stated:

“To me, it wasn’t anything that was substantial enough to resolve their issues,” Alex Grant, who manages the $493 million RS Tax-Exempt Fund and $265 million RS High Income Municipal Bond Fund, said of the pension proposal. “Seven percent of the thing is funded. What do you do with that? It’s going to take a lot more than what they’re doing to resolve that problem.”

Not to be forgotten is the fact that reform aside, Puerto Rico must still identify over 100 million dollars in recurring revenue to plug into the ERS in order to maintain its solvency.

The proposal now moves to the legislature for approval and public hearings, where Gov. Garcia Padilla’s party maintains control but has had to deal with a somewhat rebellious Speaker of the House, Jaime Perelló. The proposal has already been blasted by the retiree community and unions, key demographics for the ruling party to win re-election (or an election, for that matter). However, Gov. Garcia Padilla’s saving grace may be that his own party knows just how catastrophic the fiscal situation is at the ERS, while at the same time recognizing that if they must impose austerity measures, the time to do it is now, and not near the next election cycle.

On the other side of the aisle, the Statehood Party blasted the proposals, arguing that the road to fiscal recovery was being done on the backs of retirees. The attack left many analysts puzzled since it is precisely what Gov. Fortuño would have done had he been re-elected. In fact, Gov. Garcia Padilla’s proposal goes entirely against what he and his party promised during the campaign, and what he warned the Statehood Party would do if they won.

Reforming the ERS (and then the teacher’s retirement system) is of the utmost importance for the new government and for Puerto Rico as a whole. It is imperative that Gov. Garcia Padilla carries out the much needed overhaul, and bitter medicine, to the pension system.



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One Comment


  1. [...] Alejandro Garcia Padilla was forced to scale back some of his loftier campaign promises when he proposed austerity cuts to Puerto Rico’s Employee Retirement System (ERS). The move, as many predicted, comes as the ERS faces a structural deficit of over 30 billion [...]



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