Fitch: Revenue, Pension Cost Continue to Pressure Rio's Liquidity
ERio launched a refinance agreement program and improved tax collection, as the state's operating revenues declined in 2015. In 2016, the state has relied on nonrecurring revenues, including the issuance of debt linked to the collection of past due taxes and bus concessions. However, these revenues have yet to materialize. Once they begin to rise, these nonrecurring revenues are unlikely to cover the substantial budget shortfall caused by increasing pension expenditures. ERio must allocate BRL12 billion (USD3.7 billion) to fund just one of its pension funds (Fundo Financeiro) in 2016. Lowering benefits is possible in the long run.
ERio's current pension plan offers the same benefits to retirees and current employees, and includes salary increases. Under Brazilian law, only the federal government is permitted to make changes to the structural features of the local pension systems, which could be passed in the following months. Personnel expenditures, including pension and retirement payments, are a substantial part of the budget. In 2015, those costs were 53.7% of operating expenditures.
ERio and the other Brazilian states will not see significant improvements in their credits until the debt they owe to the federal government is modified, and we also believe some kind of bailout is likely in 2016 or 2017. However, even if the federal government were to allow states to postpone service payments for one year, savings would amount to just 25% of ERio's annual state payroll expenditures.
The state legislature isn't likely to pass any meaningful laws in the near term. Members of the Assembleia Legislativa are running in elections this October and passing laws that that might increase employee contributions to the pension system or cut budgets could hurt election campaigns. Once elections are over, we believe additional legislation could develop.
The infrastructure costs associated with hosting the World Cup and Olympic Games contributed to the state's long-term debts and will not impact its near-term liquidity issues. ERio has entered into significant credit agreements that raised its long-term debt to BRL36.7 billion in 2015. Only 1.4% of that amount is not guaranteed by the federal government.