Puerto Rico may not have statehood status, but it’s picking up some of the United States’ habits. Lately, that means weighing bankruptcy. And, like the United States, ballooning pension obligations are a major reason Puerto Rico is wearing the proverbial fiscal handcuffs.
Momentum is building toward a deal that would make painful losses inevitable for investors holding about $20 billion in bonds issued by Puerto Rico’s highway, water and electricity authorities even as some big U.S. mutual funds launch a legal battle to squelch a new law that authorizes a restructuring.
The Puerto Rican government and most of its creditors have hired U.S.-based bankruptcy experts to advise them through the Caribbean island’s efforts to solve its debt problem, and the resolution figures to look a lot like a U.S.-style bankruptcy.
The crisis came to a head late last month when Governor Alejandro Garcia Padilla pushed through the Public Corporations Debt Enforcement and Recovery Act to create a bankruptcy-like process for restructuring the debt of commonwealth-run corporations.
This isn’t coming out of nowhere; the writing has been on the wall recently. Just two weeks ago, Fitch downgraded a number of Puerto Rico’s bonds. From a Fitch press release via Business Wire:
Puerto Rico’s bonded debt levels and unfunded pension liabilities are very high relative to U.S. states, with a large amount of outstanding debt issued for deficit financing purposes. Pension funding will remain exceptionally low even with the significant pension reform effort undertaken by the current administration, and the April 2014 Puerto Rico Supreme Court decision finding recent reforms of the teachers’ retirement system unconstitutional presented the administration with yet another challenge. 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.
Puerto Rico tried earlier this year to reform its teacher pension system, which is set to run out of money by 2020. The Island passed a law that increased retirement ages and employee contributions, while mandating that the system adopt more 401(k) qualities. But a court struck down the law in April.