(Recasts with decision, adds background of case and pension reform)
SAN JUAN, April 11 (Reuters) - 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 stated.
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 loss.
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 experts.
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.
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 constitutional.
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 retired beneficiaries.
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)