Puerto Rico officials today unveiled a plan to raise the island’s retirement age and employee contributions to strengthen a pension with a funding level lower than any U.S. state.
Governor Alejandro Garcia Padilla, a member of the Popular Democratic Party who took office last month, wants to boost the 6.8 percent funding level of the commonwealth’s largest retirement system. The plan will run out of assets in 2014, according to the Government Development Bank for Puerto Rico, the fiscal agent of the self-governing commonwealth.
The pension strains contributed to Moody’s Investors Service’s move in December to lower the island to one step above junk. Puerto Rico securities are tax-exempt in all U.S. states and have lured investors nationwide hunting for extra yield.
The governor’s plan includes lifting the retirement age in stages, to 65 from 58 for workers who have been in the system the longest, and to 67 from 60 for the newest employees, according to a press release from the Development Bank. Employees would also pay 10 percent of their salaries toward retirement, from about 8 percent, according to the release.
Puerto Rico’s legislature will consider the proposal. The commonwealth must implement pension changes before it can sell debt, Javier Ferrer, president of the Development Bank, has said.
The e-mailed proposal doesn’t include selling pension-obligation bonds. Puerto Rico had almost $3 billion of such bonds and $9.8 billion of general-obligation debt as of March 31, according to the commonwealth.
The recommendations would reduce workers’ December bonuses and eliminate summer bonuses, while also cutting some healthcare contributions. The system would gain $100 million annually from Puerto Rico’s general fund, according to the release.
The plan increases some benefits, such as raising minimum pension levels. Employees hired after 2000 would receive an annuity upon retirement rather than a one-time payment.
The commonwealth’s Government Employees Retirement System, which includes 131,361 workers and 116,658 retirees, had $25.5 billion in projected obligations to current and future retirees, according to the most recent actuarial report.
By comparison, Illinois had about 43 percent of needed assets, the weakest funding ratio among states, data compiled by Bloomberg show.
Moody’s rates Puerto Rico Baa3, its lowest investment grade, with a negative outlook. Standard & Poor’s has the commonwealth one level higher at BBB, also with a negative outlook.
Puerto Rico general-obligation bonds maturing in July 2041 traded today with an average yield of 5.09 percent, or 2.1 percentage points above a benchmark index, data compiled by Bloomberg show.
The commonwealth had $51.9 billion of net tax-supported debt, or $14,004 per capita, about 10 times the U.S. average, according to the latest Moody’s tally.
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