After similar challenges fought in 42 other states, Muniland’s two weakest credits – Illinois and Puerto Rico – are fighting difficult battles over pension reform. The pension struggles will have enormous effects on their creditworthiness.
Puerto Rico’s pension fund, which is dangerously close to insolvency, figured prominently in credit rater Moody’s analysis when it downgraded the commonwealth last December to Baa3, its lowest investment grade rating:
- Economic growth prospects remain weak after six years of recession and could be further dampened by the commonwealth’s efforts to control spending and reform its retirement system, both of which are needed to stabilize the commonwealth’s financial results. The lack of significant economic growth drivers and the commonwealth’s declining population have also reduced prospects for a strong economic recovery.
- Debt levels are very high and continue to grow.
- Lack of meaningful pension reform and no clear timetable to do so. Reform of the commonwealth’s severely underfunded retirement systems is needed to avoid asset depletion and future budget pressure.
Puerto Rico’s official leadership has promised pension reform, but it now appears stalled in the legislative assembly. Twitter is aflame with rumors of short whip counts and meetings at La Fortaleza (The Fortress), the official residence of the governor.