Board to Puerto Rico: Cut pension system, impose furloughs

SAN JUAN, Puerto Rico — A federal control board on Monday said Puerto Rico's government needs to cut its public pension system by 10 percent, furlough tens of thousands of its workers and eliminate Christmas bonuses if it cannot generate other types of savings amid a nearly decade-long recession.

The seven-member board created by Congress last year to oversee the U.S. territory's finances voted unanimously to add those measures to a 10-year fiscal plan presented by the island's governor that the panel approved Monday. The measures will be implemented if the government fails to find other ways to cut spending and increase revenue.

Board members said the spending cuts will be necessary so the government will have enough funds to pay for essential services such as education, health and public safety.

"Puerto Rico is about to capsize," said board member David Skeel. "The island is overwhelmed by debt. Puerto Rico is in real danger of running out of money for even the most basic essential services."

Skeel and other board members who met in New York said the plan calls for everyone on the U.S. territory of 3.4 million people to make sacrifices.

Gov. Ricardo Rossello, whose government is struggling with nearly $70 billion in public debt that it is seeking to restructure, had resisted some of the board's cuts, arguing they would fall too heavily on many living in Puerto Rico. He told The Associated Press that he was pleased with the plan and is confident his administration will find ways to head off the furloughs and the elimination of Christmas bonuses.

"That's my goal," he said by phone. "We're taking bold steps to making sure the economy gets jumpstarted. We're very much well on our way."

Elias Sanchez, the governor's representative to the board, told the AP that the territory's government hopes to avoid at least the first round of furloughs by proving it will have $200 million in cash reserves by June 30.

Sanchez praised the board's approval, saying: "It's a well thought-out plan that doesn't hide the fact that we face great challenges."

However, the board and Puerto Rico's government still disagree about cuts to the island's public pension system that would hit hundreds of thousands of government workers. The system faces $50 billion in liabilities and is expected to run out of money by year's end. Board members said they will protect the most vulnerable retirees and ensure no one is pushed into poverty.

The board will make recommendations by next month on what kind of pension changes will be implemented, but it said that the system will switch to a pay-as-you-go funding method and that teachers and public safety workers will be enrolled in Social Security by 2020. Currently, teachers and police officers in Puerto Rico do not receive Social Security.

The board demanded furloughs of two days a month for teachers and four days a month for other government workers, saying the step would save up to $40 million a month. The furloughs will take effect July 1 unless the government proposes other cost-saving measures. In addition, all Christmas bonuses could be eliminated by fiscal year 2018.

"This is barely the end of the beginning of a long process to get Puerto Rico on the road to economic growth again," said board member Jose Ramon Gonzalez. "There are no simple, no easy, no painless solutions to the problems that have built up over 20 years."

Puerto Rico racked up debt in recent decades by borrowing to balance its budget even as the economy was sputtering. In June 2015, the then governor announced that public debt totaling more than $70 billion was unpayable, and the island has defaulted on millions of dollars owed since then, forcing U.S. Congress to step in and sparking a barrage of lawsuits by creditors. The plan sets aside $800 million a year for debt payments, a fraction of the $35 billion due in interest and payments over the next decade.

Many believe the measures in the fiscal plan will provoke a further exodus from Puerto Ricans, which has seen a half million residents move to the U.S. mainland since 2005. Those who remain have faced new taxes, higher utility bills and a 12 percent unemployment rate on an island where food is 22 percent more expensive than the U.S. mainland and public services are 64 percent more expensive.

Hundreds of Puerto Ricans blocked traffic along one of the capital's main roads to protest the fiscal plan, and more protests were expected in upcoming days.

The plan drafted by the government and approved by the board also will cap some Medicaid benefits, effectively raise property taxes and scrap some infrastructure projects while possibly turning ferries, ports and parking lots over to private companies. It will freeze salaries until 2020, seeks to privatize the generation of power and increase motor vehicle license fees by 10 percent. It also will lead to more than $300 million in cuts at Puerto Rico's largest public university and a tax increase on tobacco products.

"We are hopeful that the future will be brighter," board member Ana Matosantos said. "It will require sacrifices from students, working people, bondholders, retirees and others."

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Danica Coto on Twitter: https://twitter.com/danicacoto