NEW YORK--(BUSINESS WIRE)--The pension reforms that Puerto Rico enacted are positive and an important step toward achieving credit stability. However, Fitch's rating on Puerto Rico's general obligation (GO) bonds ('BBB-' with a Negative Rating Outlook) assumed enacting pension reform to support the solvency of the pension system while controlling the demands that pensions place on the budget. The commonwealth continues to face several challenges including a very large structural budget gap that is unlikely to be resolved before fiscal 2015.
The reforms (signed into law last week) aim to reduce future cash flow deficits in the plan both by increasing payments into the plan and reducing future cash payments out of the plan. The legislation converts the current PERS defined benefit plan into a hybrid defined benefit/defined contribution plan, and, among other provisions, raises employee contributions, increases the retirement age, and reduces future benefit payments. Even with these changes, the commonwealth will have to increase its annual payments to the fund.
The current fiscal year's economic and revenue underperformance have meaningfully increased the size of the fiscal 2013 operating imbalance and widened the gap the commonwealth must address in its upcoming budget deliberations. While Fitch does not expect the fiscal 2014 budget to be structurally balanced, the rating assumes substantial progress toward structural balance.
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