Dec 24 Puerto Rico's Senate by the thinnest of margins has approved an overhaul of the Caribbean island's deficit-ridden Teachers Pension Fund, which U.S. credit ratings agencies have said is essential to it holding onto its investment-grade bond ratings.
Already passed by Puerto Rico's House and backed by Gov. Alejandro Garcia Padilla, the reforms will boost employee contributions to 10 percent from 9 percent and push up minimum retirement ages to 62 that are now as low as 50 for new employees. The changes are widely opposed by the U.S. commonwealth's 80,000 current and retired teachers.
Current employees can retire at 55 with 30 years of service, or at 60 with less than 30 years, according to the new changes. Teachers in Puerto Rico are not covered by the U.S. Social Security system. The average retiree now gets $1,371 monthly.
Puerto Rico teachers' fund has an actuarial deficit of $10.251 billion and will run out of funds by 2020 without a reform, according to forecasts.
Senators authorized the changes late on Monday by a vote of 14 to 13 as teachers protested the proceedings.
"Reforming the Commonwealth's Teacher Pension System is an important step forward in making the structural changes Puerto Rico needs to strengthen its long-term fiscal health," said Garcia Padilla.
With some $70 billion of municipal bonds outstanding, Puerto Rico has raised taxes, reformed another pension system and cut staff in moves meant to counter chronic budget deficits and an economy in or near recession for eight years.
Credit rating agencies have said they are considering labeling Puerto Rico's general obligation debt as junk bonds. The island already pays the highest interest rates of any big munis issuer.
Meeting in special session, the legislature's lower chamber on Saturday approved the reforms by a vote of 26-20 despite protests by some teachers who occupied the Senate floor last Thursday. Protesting teachers clashed with police outside the Capitol building on Saturday.
Protests and a heavy police presence continued Monday. The Teachers Federation, the largest of three unions representing the U.S. commonwealth's educators, has threatened to strike in January over the changes. The island's constitution prohibits teachers from striking, according to the governor.
The legislation was expected to be quickly signed by the governor, who has also raised water rates to increase revenue and pledged a balanced annual budget in two years.
Moody's and Fitch have warned of credit downgrades to junk in 2014 if the economy fails to improve or the government fails to maintain access to the municipal bond market.
The teachers pension reform follows a reform earlier this year of the Government Employees Retirement System, which covers most other government workers. While the Teachers Pension Fund is smaller, both systems cost the central government the same, about $500 million a year.
With 41,973 participating active teachers plus 37,996 retired beneficiaries, the fund receives just 17 cents of each $1 it must spend each year on benefits and operations.