Unfunded Pension Funds Ticking Time Bombs
Lower Government Funding Hinders Stability of P.R.’s Three Main Retirement Systems
In 2013, the Alejandro García Padilla administration, which had just entered office, enacted legislation to reform Puerto Rico’s ailing retirement systems, as their assets were quickly vanishing and pensioners were facing the risk of not receiving their benefits. The pension reform sought to ensure solvency.
Three years later, red flags are continuing to linger, as the three main pension systems—commonwealth employees, teachers and the judiciary—are still severely underfunded and projected to completely deplete their assets in the next few years, according to valuations conducted by Milliman, the government’s independent actuaries.
To date, the administration has met its short-term pension obligations, including debt service on its roughly $3 billion in pension bonds, which are backed by employer contributions. Moreover, the government will pay about $580 million in payments to pensioners throughout the rest of the current fiscal year, which ends June 30, although the commonwealth is using funds that were already advanced by the retirement systems.
Still, the government has been unable to meet funding requirements as provided under the 2013 reform, given a severe cash crunch that officials say still threatens essential services to residents and has already taken its toll on taxpayers, suppliers and certain bondholders.
“Each dollar you don’t contribute today, we would have to do so tomorrow,” Office of Management & Budget (OMB) Director Luis Cruz recently told reporters, after explaining the administration’s decision to further reduce contributions to the systems during fiscal 2016.
A share of the commonwealth’s general-fund budget goes to cover costs associated with Puerto Rico’s pension systems, which are mainly funded by employer contributions (central government, public corporations and municipalities) and employees, as well as investment income from the systems’ assets. Together, these have roughly $43 billion in net pension liabilities, or more than 60% of the island’s gross national product in fiscal 2014—on top of the island’s $70 billion debt.
Kicking the fix down the road?
The sweeping pension reform reduced benefits, increased employee contributions and replaced defined benefits for a defined-contribution system. It also established an “additional uniform contribution” (AUC) to be made by the government, in a bid to stabilize the system’s assets.
While it was already anticipated that expenses, which include debt service, would continue to exceed money entering into the systems, meeting the additional contribution in full is key to guaranteeing the government’s ability to make benefit payments as they come due without first depleting the systems’ gross assets, according to the government’s most recent financial report.
But as cash flow and other fiscal woes have moved into higher gear since the pension reform was enacted, the government has failed to make the required full contributions to the system. General-fund revenue shortfalls have prompted the commonwealth government to place its contributions to the retirement systems in third-priority category, as provided under the Puerto Rico Constitution, whenever available resources haven’t been sufficient to cover budgetary appropriations.
“This contribution [the AUC], due to the fiscal situation, hasn’t been done yet,” Cruz acknowledged a few weeks ago, when announcing a downward revision to the commonwealth’s current fiscal year budget, which went from $9.8 billion to $9.3 billion.
During this fiscal year, only $61 million—out of a required $257 million—had been allocated for the additional contributions. The allocation now decreases to $42 million following the García Padilla administration’s recent announcement of new spending cuts that include a $19 million reduction to the AUC this fiscal year.
In fact, the government’s AUC requirements have hardly been met at all since 2013, and the practice of selling assets to cover payment of current benefits continues.
When asked how the latest adjustments would affect the island’s pensioners, the OMB chief said: “Immediately, it has no effect, because government contributions are still being made.”