Puerto Rican Governor Claims Pension Fix Seen Within 10 Years

(March 29, 2011) – Optimism it may be, but Puerto Rico Governor Luis Fortuno believes that the island Commonwealth, home to America’s most fiscally unsound public pension, will fix its retirement funding problem in eight to 10 years. 

In an interview with Bloomberg, Fortuno said Puerto Rico’s pension issue – which sees its public employees’ pension at an approximately 14.5% funded status – is still a mounting problem with major room for improvement. “Certainly, that’s part of what I inherited, in addition to a dismal fiscal situation,” Fortuno said, comparing the pension underfunding problem – the result of local political decisions going back to the 1940’s, as aiCIO showed in December, 2009 – to its equally troubling budgetary issue. “We are one of the very few jurisdictions [that have] already moved into a defined contribution type of system,” he added. “We will fix it the same way we fixed the fiscal situation.”

The Commonwealth’s fiscal situation – which saw it have a $3.2 billion 2009 budget deficit, proportionally worse than any other state or political entity within America – is being attacked in the same way as in many other states: a combination of spending cuts, tax cuts, and changes to public employee pension systems. As for the last in this list, Fortuno claims no quick fix, instead relying on “eight to ten years for sure” to solve the problem. “But, we are moving in the right direction,” he added. In addition, Fortuno told the news service that the US territory’s budget gap will be closed in approximately two fiscal years, aided by the Legislature’s plan, passed in January, which lowers corporate taxes by an average of 30%. 

The problems with the Commonwealth’s public pension have been known for some time, but such optimism has rarely been expressed. In July, Puerto Rico ERS Administrator Hector Mayol noted that structural issues, not poor investment decisions with existing capital, were causing further declines at the fund. “Valuations show that the required cash flow (for benefit payments) is eating into our investment portfolio,” Mayol told aiCIO last year. “Unless something is done, 2017 or 2018 looks like the date where we run out of cash – but because of these cash-flow issues, it’s probably closer to 2014 or 2015, or even earlier. Right now, we’re liquidating a whole bunch of assets to cover the June 30 fiscal year end,” Mayol noted.

Despite the developments to improve Puerto Rico’s pension, Mayol said he had a realistic set of expectations to make-up the system’s billions of dollars in actuarial deficit. “I think that some progress will be made,” he said. “I am not 100% confident that it will be a fully permanent solution in the sense that we will see the assets begin to grow. I hope to see some room in future budgets for contribution increases; on the other hand, cutting back on benefits is possibly something that has to be taken a look at. Of course, this is politically sensitive.”