Moody’s Investors Service says a court ruling in favor of Puerto Rico’s pension overhaul is a credit positive for the commonwealth.
The Supreme Court of Puerto Rico issued a ruling supporting an overhaul of the Employee Retirement System, the government’s largest pension system.
The court ruled in favor of the pension reform, “despite reducing certain contractual obligations the commonwealth’s ERS made to public employees,” wrote Moody’s vice president Lisa Heller. “The court deemed the reductions necessary to preserve the retirement system’s solvency.”
The Puerto Rico government approved the reform in early April.
Before the reform the ERS had only 6 cents for every dollar actuarially required. All three major rating agencies have said that the system as it has existed was a potentially large financial problem for the government.
If nothing had been done, the fund was expected to run out of money in 2019. The government would have been forced to make large payments from its general fund to support the pensions.
The enacted reform will also require general fund contributions to the pension fund, but they will be steady and moderate in size.
The reform reduces certain benefits for existing as well as new employees.
The existing ERS plan is actually three plans, with enrollments based on when employees started employment with the government. Two earlier plans have had defined benefits. Employees covered by those earlier plans are being converted to hybrid plans, with defined benefit and defined contribution components.
Retiring employees of all three plans will be given annuities rather than single lump-sum payments, as had previously been the case. The retirement age will be increased for most employees.