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Puerto Rico supreme court decision yet another challenge, says ratings agency
Published on April 17, 2014 Email To Friend    Print Version

NEW YORK, USA -- Fitch Ratings said it believes that the Puerto Rico Supreme Court decision finding recent reforms of the teachers retirement system unconstitutional presents the administration with yet another challenge as it works to stabilize the commonwealth's fiscal position.

Progress on multiple fronts once again has been offset by a new setback. However, Fitch noted that the ultimate fate of the pension reform efforts remains to be seen and the court decision does not have an immediate impact on the commonwealth's budget.

The Supreme Court decision does not trigger any rating action by Fitch. Fitch said it continues to see the economy as the key to future rating direction. Fitch believes that achieving and maintaining budget balance will remain challenging, and last week's decision, if unaddressed, would add to that challenge over time and further weaken the commonwealth's liability picture.

However, at the same time, there have been some positive recent credit developments. The successful sale of $3.5 billion in general obligation (GO) bonds last month provided some critical breathing room, overall general fund revenues through March remain in line with projections three-quarters through the fiscal year, and some recent economic information suggests nascent stabilization.

Also, Fitch noted that the commonwealth was successful last year in reforming the employees retirement system, which is a bigger burden on the general fund budget, and the Supreme Court quickly validated the constitutionality of those reforms.

In the coming weeks the governor is expected to release his budget proposal for the fiscal year beginning July 1, which he has announced will be balanced. The court decision has no direct negative impact on the near-term budget, but the commonwealth has stated in the past that without reform the teachers retirement system would confront an annual cash flow deficit beginning in fiscal 2020.

The commonwealth has three main retirement systems, which cover most public sector workers. The employees retirement system's defined benefit plans were closed in 2000; since then, all new employees have been on a defined contribution plan. The teachers system reform was designed to convert that plan to a defined contribution system, among numerous other changes; the reform legislation was passed in late December 2013 but stayed by the Supreme Court in January 2014. Recent pension reform efforts have focused on achieving a predictable annual funding scheme. Pension funding is expected to remain exceptionally low, even with pension reform.

Fitch's 'BB' rating and Negative Outlook on the commonwealth's general obligation debt reflects demonstrated weakness in the Puerto Rico economy, very high liabilities including outstanding debt and unfunded pensions, challenged though improving financial operations, and limited financial flexibility.
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