Fitch Ratings has affirmed its BBB-plus rating on the Employees Retirement System of the Commonwealth of Puerto Rico’s $2.9 billion senior pension funding bonds.
The outlook is stable.
Fitch rates the pension bonds higher than Moody’s Investors Service and Standard & Poor’s, which rate the bonds at Baa3 and BBB-minus, respectively.
Standard & Poor’s
Fitch, however, views this ability more positively.
“The rating reflects the strength of the pledged revenue stream, which consists of employer contributions into the employees retirement system by the commonwealth, associated public corporations, and municipalities,” Fitch analysts said in a report.
The rating is in line with its rating on the commonwealth’s general obligation bonds at BBB-plus.
Fitch cites a strong legal obligation for employers to make contributions to the retirement system, and a long history of timely payment and legal protections against the legislature making changes to the system that would reduce the system’s funded status.
The debt structure of the bonds is weak, analysts said, with a very long final maturity of 50 years and a rising debt service profile.
Reduced debt service coverage or a weakening in the general credit quality of the commonwealth could cause a rating change.
The Employees Retirement System is a trust that was created in 1951. Eligible participants include employees of central government agencies, municipalities, and most public corporations. Employees hired before Jan.1, 2000 are covered under a defined benefit plan, while those hired on or after this date receive no defined benefit or employer contribution.
As of June 30, 2011 the ERS had a funded ratio of 6.8%, with an unfunded accrued actuarial liability of $23.7 billion. Recently enacted legislation has begun to address the problem by requiring incremental increases in contribution rates.
