Burdened by Pension Debt, Puerto Rico Warned Over Bond Rating

(May 5, 2011) – With the nation’s most underfunded pension plan, Puerto Rico has been warned by a rating agency over its creditworthiness.

The Commonwealth’s debt is currently rated A3 by Moody’s, four grades above junk; however, with an estimated $24 billion funding deficit – plus $42 billion in debt backed by taxes, according to Reuters – this could soon be in jeopardy. The pension and tax-backed debt combined is seven times the annual budget of the small island, which amounts to "a combined burden that will exert significant budgetary pressure for many years to come," according to Moody’s. As a result, the firm is warning that a downgrade may be imminent. According to the Wall Street Journal, $28 billion of the Commonwealth’s debt would be affected by a downgrade – which could come with 90 days.

Puerto Rico is not the first American political entity threatened with a credit downgrade over public sector employee retirement plan debt. On April 1, Standard & Poor’s downgraded the city of Pittsburgh’s debt outlook from “stable” to “negative.” According to the rating agency, this was at least partially a result of concerns regarding the city’s pension plan, which at $650 million underfunded (as of late last year) implies a funding ratio of 29% – one of the lowest in America.

“Pittsburgh City Council put politics over the financial health of our City and because of that, one of the world’s leading credit rating agencies raised the red-flag on our financial future,” Mayor Luke Ravenstahl told aiCIO at the time. “This shouldn’t be a surprise, after Council chose to vote down the only real solution that addressed our pension crisis. It’s unfortunate and a shame that four years of bond rating upgrades have ceased, when we had a golden opportunity to greatly improve our City’s financial health and show the world that Pittsburgh is the best place in which to invest.”

The threatened Puerto Rican downgrade comes despite statements from Governor Luis Fortuno that the pension system can be fixed within ten years. In a recent interview with Bloomberg News, Fortuno said Puerto Rico's pension issue – which sees its public employees’ pension at an approximately 14.5% funded status – is still a mounting problem with major room for improvement. “Certainly, that’s part of what I inherited, in addition to a dismal fiscal situation,” Fortuno said, comparing the pension underfunding problem – the result of local political decisions going back to the 1940’s, as aiCIO showed in December, 2009 – to its equally troubling budgetary issue. “We are one of the very few jurisdictions [that have] already moved into a defined contribution type of system,” he added. “We will fix it the same way we fixed the fiscal situation.”