Government labor strife is latest test for fractured Puerto Rico

NEW YORK, Aug 30(Reuters) - Puerto Rico’s already frail economy faces a fresh test this week, as the bankrupt U.S. territory’s financial overseers try to force a defiant governor to furlough public workers, the single biggest block of employees on the island.

An escalating power struggle between the democratically elected Governor Ricardo Rossello and the federally appointed oversight panel culminated on Monday when the board sued Rossello, saying he had no authority to reject pension cuts and furloughs ordered by the board. The measures are set to begin Sept 1.

A competing lawsuit from the American Federation of State, County and Municipal Employees (AFSCME), which represents 12,000 Puerto Rican workers, argues the exact opposite - that the measures violate the U.S. Constitution, and should be halted.

At least six unions are staging protests on Wednesday to oppose the austerity, featuring a midday march to the board’s San Juan offices.

Puerto Rico, shouldering $72 billion in debt, has filed the biggest government bankruptcy in U.S. history as it reels from a shrinking population, a 45 percent poverty rate and near-insolvent public health and retirement systems.

As hostility over labor now mounts, stakes are high - and the island’s investors are taking note.

Defeating the furloughs and pension cuts could undercut the board’s authority to impose politically unappealing structural fixes that Puerto Rico may need, and for which investors have long agitated - labor reform included.

As of July, more than a quarter of all non-farm jobs in Puerto Rico were in the public sector. This is a higher percentage than any U.S. state, and roughly 10 percentage points above the U.S. average of 15.2 percent, according to data from the U.S. Bureau of Labor Statistics.

Yet, should the board’s proposals take effect, thousands of state-level government workers would suffer cuts to their income, which could crimp spending capacity among public employees and perpetuate labor strife.

“For any plan to restructure Puerto Rico to be legitimate, it needs buy-in from employees,” said Matt Fabian, a municipal debt analyst at MMA Inc.

Some municipalities have already cut hours or wages. The board has said its proposed two-day-a-month furloughs could save $218 million this fiscal year, nearly a quarter of the $880 million of savings from government “right-sizing” that the board has called for.

Investors welcome labor reform. But as the issue becomes increasingly contentious, some fret that the board’s arrival in 2016, under the federal Puerto Rico rescue law dubbed PROMESA, has only made the island’s economic picture more chaotic.

“Everyone’s goals should be aligned,” said Ben Eiler, managing partner at First Southern Securities, which has offices in Puerto Rico and trades the island’s debt.

But the board and Rossello have been anything but aligned. The former was tapped by U.S. lawmakers to help Puerto Rico restructure debt and cut spending. The latter, elected last November, is struggling to balance a campaign promise of fiscal stability with protecting the mostly poor voters who elected him.

Rossello may see political advantage in going to the mat to avoid furloughs, rather than embrace them as an alternative to layoffs, said Tracy Gordon, a municipal debt expert and senior fellow at the Urban-Brookings Tax Policy Center.

“Even if he loses,” Gordon said, “at least he’s known for taking a stand.”

Eiler would rather both sides compromise quickly. He says achieving labor peace is key, not just for workers, but for investors who want to see the island’s economy grow.

Noting a Rossello initiative to privatize some public assets, Eiler said “the unions’ cooperation is imperative” for public-private partnerships.

“It can dramatically affect the sales price,” he said.

Reporting by Nick Brown; Editing by Dan Burns and Chizu Nomiyama