UPDATE 2-Puerto Rico's top court backs judicial pension reform -governor

Fri Feb 21, 2014 4:44pm EST

NEW YORK Feb 21 (Reuters) - Puerto Rico's Supreme Court upheld as constitutional a judicial pension reform that is part of a broad cost-cutting campaign by the Caribbean island's heavily indebted government, Puerto Rico's governor said on Friday.

"This reform, paired with the legislative reforms to the public employee retirement system and the teacher pension system, are key elements of my plan to make the structural changes needed to end Puerto Rico's fiscal crisis," Governor Alejandro Garcia Padilla said in a news release.

The ruling was unanimous, but the court determined the new pension rules would apply only to judges named after the law was enacted on December 24, 2013.

Teachers covered by a separate retirement plan are also opposing in court a pension overhaul by Puerto Rico, whose credit ratings were reduced this month to junk even as it prepares a nearly $3 billion bond offering expected in March.

The U.S. territory has outstanding debt of about $70 billion and pays by far the highest tax-free rates of any big municipal bond seller. Its economy has been shrinking for most of the last eight years, leading to high unemployment and population losses.

Pension reforms have been an important part of recent belt-tightening efforts by the government. Those have also included broad spending cuts and higher taxes.

The ruling could cheer investors if it is viewed as a prelude to a separate ruling on the teachers' pension system, which has an actuarial deficit of $10 billion and is slated to run out of cash by 2020 without the reform, officials have said.

There are 41,973 participants and 37,996 retired beneficiaries, with the fund receiving just 17 cents for each $1 it needs each year to pay for benefits and operations.

Teachers are threatening to strike over the issue in March.

The Supreme Court last year upheld a reform of Puerto Rico's largest pension system, the Government Employees Retirement System.

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