Puerto Rico's $72 billion debt burden overshadows another financial threat to the Caribbean island: a government workers pension fund that's set to go broke in five years.
As Gov. Alejandro Garcia Padilla prepares to push for bondholders to renegotiate debts he says the commonwealth can't afford, he's also contending with an estimated $30 billion shortfall in the Employees Retirement System. The pension fund, which covers 119,975 employees, as of June 2014 had just 0.7% of the assets needed to pay all the benefits that had been promised, a level unheard of among U.S. states.
If not fixed, the depleted fund could jeopardize a fiscal recovery by foisting soaring bills onto the cash-strapped government even if investors agree to reduce the island's debt. The system is poised to run out of money by 2020, which would leave the government on the hook for more than $2 billion in benefit payments the next year alone, according to Moody's Investors Service. That's equal to about one-fourth of this year's general fund revenue.
In August, Puerto Rico defaulted on some bonds for the first time, and Mr. Padilla has said that reducing its debt is crucial to the island's economic recovery.
His administration and outside advisers on Sept. 9 released a plan to repair the island's finances, which included closing schools and reducing benefits to the poor. It also envisions making increased pension payments that have been delayed because the government hasn't had the money.
“We believe this plan addresses the system's needs and assures pensioners and participants that their benefits will be paid,” Pedro Ortiz Cortes, administrator for the retirement system, said in an e-mail Thursday.
In 2013, the government raised the retirement age, increased employee contributions and reduced or eliminated retiree bonuses.
Current and prior administrations have implemented changes to improve the pension system, including closing it to new employees and offering them annuities instead. To give it cash to invest, it sold $2.9 billion of bonds in 2008, just before the credit crisis caused stock prices to plunge. The pension system is now obligated to repay the securities, which have tumbled in value amid doubts about its ability to do so.
Also this week, a group of hedge funds holding $5.2 billion of Puerto Rican debt disbanded as creditors prepare for talks to restructure the island's obligations in smaller alliances, said two people with knowledge of the matter.
The group, which counted more than three dozen firms as members, had begun losing support as some broke off to form more nimble coalitions, said the people, who asked not to be named because the information isn't public. The defections started after Mr. Padilla said in June that the government's debts were “not payable” and it became clear officials would seek to restructure rather than borrow.
The creditors had joined to structure and fund a debt package that they thought would help the cash-strapped U.S. territory bridge its budget gap before longer-term reform measures alleviated the deficit. The hedge funds, sometimes referred to as the “ad hoc group,” had been negotiating since at least February with Puerto Rican officials over the sale of $2.9 billion of new petroleum-tax bonds, people with knowledge of the matter said at the time.
