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Commonwealth pension plans are severely unfounded

BY ELISABETH ROMAN of Caribbean Business

July 14, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

The new administrator of the Commonwealth Employees Retirement System, Juan Cancel certainly has his work cut out for him. The new administrator has inherited a government-employee pension-fund system that for decades has suffered from bad decisions and policy-making, to the point it now has the lowest funding ratio of any state pension plan in the U.S.

With $11.191 billion in actuarial liabilities and only $1.947 billion in actuarial assets as of July 1, 2003, the system faces a deficit of $9.244 billion. Gov. Aníbal Acevedo Vilá’s transition team went even further and estimated in December 2004 that the Commonwealth’s pension was unfunded by as much as $11 billion.

Problems with the pension fund, along with budget deficits, have been cited by both Standard & Poor’s and Moody’s for the downgrade of Commonwealth bonds in May. With a funding ratio of only 17%, the lowest in the nation, and the number of Commonwealth retirees growing, drastic measures will have to be taken to restore the fund’s solvency.

The fact the Commonwealth pension system was created and workers began receiving benefits without having the funds to pay for them was further compounded by benefits that are being paid that aren’t in direct correlation to the contributions that were made to the system. Investment choices also have contributed to the system’s fiscal problems. From the beginning of the system up until 1988, investments were limited to fixed-income instruments, which didn’t always beat inflation rates or contribute to the system’s growth. One of the biggest problems the retirement system has endured, however, is the hundreds, yes hundreds, of approved legislation that have had an impact on benefits and pension amounts without assigning the necessary funds.

Cancel candidly admits to CARIBBEAN BUSINESS that if nothing is done to remedy the Commonwealth employees retirement system, it won’t be able to last more than 15 to 17 years. For the past five to six years, the system already has been paying more benefits than it has been receiving in contributions. The administrator says if nothing is done soon, the system may have to start selling off its assets.

Puerto Rico isn’t alone in this pension ordeal. State pension plans across the nation are facing many of the same challenges as the Commonwealth retirement system and demographics are working against them as baby boomers begin retiring in large numbers. States on the mainland, however, have begun taking the necessary measures to fund their pension plans, although Illinois, which has the lowest funding ratio among statewide systems, is underfunded by 49%, compared to 17% in the Commonwealth.

In Puerto Rico, among the measures needed are for government agencies, which owe the retirement system $93.2 million, to start paying down their debt. Due to the fact, however, that many public corporations, agencies, and municipalities are facing tighter budgets for fiscal year 2006, it is unlikely this will happen anytime soon. While Cancel emphasizes the need to approve the $2 billion bond issue, another proposal is to increase the amount of contributions from employers and individuals, which haven’t been increased in 15 years, and could provide the system with added cash flow for the next 10 to 12 years.

The truth is that something has to be done soon, before the Commonwealth receives another blow to its credit rating.

This Caribbean Business article appears courtesy of Casiano Communications.
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