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Puerto Rico Municipal Bond Crisis - Unfunded Pension Funds

Posted by Jack Duval

Nov 12, 2013 3:56:18 AM

In our continued expert analysis of the Puerto Rico municipal bond crisis, we are looking at the unfunded pension plans of the Commonwealth.


When the ratio of workers to retirees falls, state pension systems become strained.  If the trend continues, the pension system becomes unsustainable.  In a healthy pension, the support structure can be visualized as a pyramid, with many contributors at the base supporting few pensioners at the top.  However, as the large base of contributors ages there can be fewer contributors to fund the pension, especially if population growth stalls and life expectancies increase.

If this occurs, the structure of the pension system shifts from a pyramid to a diamond to an inverted pyramid.   Once inverted, there are few workers supporting many pensioners and the pension is on a crash course with math.  Funds are being drawn down at an accelerating rate and being replaced at a declining rate.

Unfunded pensions systems are a significant risk to an economy because investment and savings are diverted for wealth transfers to pensioners.  This dampens long-term growth and can open the door to social unrest as both contributors and pensioners view the pension system as unfair.

Puerto Rico Pension Plans

As could be expected from the trend of declining population, the Puerto Rico pension system is chronically underfunded.  There are five main public pension systems in Puerto Rico.  They include:

  • Puerto Rico Government Employees Retirement System (“PRGERS”);

  • Puerto Rico Judiciary Retirement System (“PRJRS”);

  • Puerto Rico Teachers Retirement System (“PRTRS”);

  • Retirement System of the University of Puerto Rico (the “University Retirement System”);

  • Employees Retirement System of the Puerto Rico Electric Power Authority (“PREPA”).

The University Retirement System and PREPA are funded independently by the revenues of their respective corporations, the remaining plans are funded by the Commonwealth.  We examine the three Commonwealth plans below.

The three Commonwealth administered plans are shockingly underfunded.  In total, they have plunged from a 24.8% funded ratio in 2007 to only 8.4% in 2012.  For comparison, the U.S. state of Illinois is considered the worst funded pension system among all of the states; its system was reportedly funded at 43% in February 2013[1].  In isolation, the PRGERS (the largest system of the three with approximately 200,000 current and retired workers[2]) is the worst, showing a $26.4 billion unfunded accrued actuarial liability (“UAAL”) as of June 30, 2012 (the most recent valuation date) and only a 4.5% funded ratio.  The

PRJRS and PRTRS are funded at 14.1% and 17.0% as of June 30, 2012 respectively.  As is clearly demonstrated in the exhibit, all three pension systems are quickly approaching insolvency, and their fates have only been worsening as they consume current assets to feed current obligations.[3]

It should be noted that Governor Padilla signed into law a series of reforms affecting the PRGERS in April 2013.  These included raising the retirement age for some workers to 65, increasing pension contributions by almost 2%, and lowering monthly pensions and benefits for some state workers.  In addition, state workers’ Christmas bonuses were reduced and summer bonuses were eliminated.[4]  Encouraging as these reforms are, however, it remains to be seen whether they will be enough to counteract long building and deep structural imbalances.

[1]                 All details on the Puerto Rico pension plans were taken directly from their respective actuarial valuations.  See the Reference Section for details.

[2]                 “Puerto Rico Senators Approve Public Pension System Overhaul,” Id.

[3]                 Kaske, Michelle, “Puerto Rico Set to Boost Worst Funded Pensions Sans Debt,” Bloomberg,  February 22, 2013

[4]                 Anonymous, “Puerto Rico Senators Approve Public Pension System Overhaul,” Reuters, April 4, 2013,


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Topics: municipal bond crisis, CEF, Puerto Rico, UBS, unfunded pension, litigation, investments, fixed income, expert opinion

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