(Recasts with decision, adds background of case and pension
SAN JUAN, April 11 The Puerto Rico Supreme Court
on Friday struck down a recently enacted overhaul of teachers'
pensions, dealing a major blow to Governor Alejandro Garcia
Padilla's efforts to fix the Caribbean island's crumbling
economy and budget.
Five of the court's nine members determined that significant
portions of the reform law were unconstitutional. Three judges
dissented and one recused himself.
The ruling stated that the reform plan, known as Law 160,
"substantially diminishes" the "contractual rights of the
petitioners in terms of their retirement plan," the ruling
Still, it said could apply to new teachers entering the
system after the law had passed in December.
It also upheld the elimination of additional benefits
originally granted to teachers through special laws that had
become part of their pension package, such as Christmas bonuses,
and contributions for medicines and health plans.
Padilla said that the decision was not "final and firm" and
that Justice Secretary Cesar Miranda would analyze the decision
to see whether to ask for a reconsideration.
The governor, who has been in office for slightly more than
a year, declined to speculate about options but insisted he
would not let the teachers' pension system collapse.
"If we do nothing, teachers will be without a pension in a
few years, and this is something I cannot allow," he said.
The reforms were a key part of recent belt-tightening
efforts by the territory's government, which is grappling with a
$70 billion debt load, sputtering economy and massive population
Word of the ruling spread quickly on Friday afternoon, but
the court did not release the decision until the evening.
Anticipation of the ruling contributed to a price plunge on $3.5
billion of bonds Puerto Rico issued last month, that started on
the news the territory had hired a spate of restructuring
The commonwealth's government overhauled the Teachers
Pension Fund in the final days of 2013, and was immediately
challenged in court by education groups.
Wall Street rating agencies had said Puerto Rico's pension
reforms were essential to improving the territory's
deteriorating credit quality. Nonetheless, all three agencies
cut Puerto Rico's rating to junk earlier this year.
FUND DEPLETED BY 2020
The decision broke with recent court trends. Last year, the
court upheld reforms of Puerto Rico's largest pension fund, the
Government Employees Retirement System, and in February it
unanimously decided that changes made to judicial pensions were
The teacher reforms were similar to changes recently made to
other public pension funds in the United States, including an
increase in the retirement age for new hires to 62. The law
raised employee contributions to the retirement system to 10
percent from 9 percent.
Most notably, it moved the pension into a 401(k)-like
system. Under the law, Puerto Rico would honor all existing
accumulated defined benefits, but then would create a
defined-contribution plan for the future.
At the court's hearing two weeks ago, lawyers for teacher
groups argued the reforms would provoke the retirement of 10,000
teachers and, in turn, actually hurt the pension's finances. The
exodus would add to the amount of benefits the system would have
to pay out while simultaneously cutting the employee
contributions, they said.
Arguing on behalf of the government, Solicitor General
Margarita Mercado countered that the reform would extend the
life of the pension system by 50 years.
Puerto Rico teachers' fund has an actuarial deficit of more
than $10 billion and will run out of funds by 2020 without
reform, according to forecasts. The fund currently has 37,996
The court had halted the implementation of the reforms until
hearing the case.
(Reporting by Reuters correspondent in San Juan; Additional
reporting and writing by Lisa Lambert in Washington; Editing by
Kevin Gray, Chris Reese and Lisa Shumaker)