Puerto Rico ordered to cut pension system, furlough workers

A federal control board on Monday ordered Puerto Rico to cut its public pension system by 10 per cent, furlough tens of thousands of government workers and eliminate Christmas bonuses to generate immediate savings amid an economic recession.

The seven-member board, created by Congress to oversee the United States territory's finances, voted unanimously to add those measures to a 10-year fiscal plan presented by the island's governor.

Board members said the spending cuts are necessary so that 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 US territory of 3.4 million people to make sacrifices.

Governor Ricardo Rossello had resisted the board's cuts, arguing they would fall too heavily on many living in Puerto Rico, which faces nearly US$70 billion in public debt that it is seeking to restructure. He could potentially avoid the new measures, but only by finding other ways to cut spending. The governor did not immediately comment on the plan, but scheduled a televised address later.

Hundreds of thousands of government workers will be hit by the cuts to the public pension system, which faces US$50 billion in liabilities and is expected to run out of money by year's end. It was not immediately clear how benefits will change, but board members stressed they will protect the most vulnerable retirees and ensure no one is pushed below the federal poverty line.

pension changes

The board said it will meet with Puerto Rico's government in the upcoming weeks to talk about what kind of pension changes will be implemented, but they said the system will switch to a pay-as-you-go 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.

Meanwhile, the board demanded furloughs of four days a month for government workers and two days a month for teachers, saying the step would result in up to US$40 million in savings a month. The furloughs will take effect on July 1 unless the government proposes other cost-saving measures. In addition, all Christmas bonuses will 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."

Many believe the austerity measures will worsen an exodus of Puerto Ricans to the US mainland, with half a million people having left the island since 2005. Those who remain behind have faced new taxes, higher utility bills and a 12 per cent unemployment rate on an island where food is 22 per cent more expensive than the US mainland and public services are 64 per cent more expensive.

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

The plan drafted by the government and approved by the board will also 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, seek to privatise the generation of power, and increase traffic and motor vehicle licence fees by 10 per cent.

Other details were not immediately available since neither Puerto Rico's government nor the board has released the text of the plan.

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

- AP