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García-Padilla signs sweeping pension reform

Gov. García-Padilla did not make an appearance Thursday, instead pre-recording a message about the Retirement System changes.

Gov. García-Padilla did not make a public appearance Thursday, instead pre-recording a message about the Retirement System changes.

Amid outcry from many public workers who will see their pension benefits dwindle once they retire from their government jobs, Puerto Rican lawmakers approved and Gov. Alejandro García-Padilla signed a sweeping reform aimed at “rescuing” the Commonwealth’s Employees Retirement System.

The reform, together with an annual legislative appropriation from the General Fund, will eliminate the System’s cash flow deficit that threatened to leave thousands of retirees without the pensions they now receive, Puerto Rico Government Development Bank President Javier Ferrer said late Thursday.

“Today, after an open and inclusive public hearing process and after years of debate on how to address the System’s recurrent shortfall, the Legislative Assembly has passed a pension reform that will safeguard the System, preserve the pensions of our retirees and, for the first time, offer a lifetime annuity to all our public employees upon retirement, while taking into consideration the most disadvantaged individuals,” he said.

“Very few other jurisdictions have implemented a pension reform as extensive and comprehensive as this one, necessary due to the precarious situation of our System,” Ferrer added. “Today we have done justice both to Puerto Rico retirees and ordinary citizens, who will not have to pay more and more from their pockets to cover benefits accrued by public employees.”

However, public workers who witnessed the moment when lawmakers approved Bill 888 did not agree. Many were angry and indignant about losing benefits after working for decades, while others recriminated legislators for not cutting back their own salaries and benefits.

Labor groups representing thousands of government workers are expected to hold a news conference today to discuss their plans, revealing Thursday that they will file a lawsuit to halt the implementation of the law, saying it violates collective bargaining agreements in place.

After signing the measure, García-Padilla released a statement saying enacting the reform “was was not a simple process. It was an issue that was sidestepped for the past 60 years. No government had assumed responsibility to reform the Retirement System to ensure a fair and dignified livelihood for employees who built this island.”

“It is an issue that if we had not taken care of now, would have irrevocably disrupted Puerto Rico’s entire economic structure,” he said.

GDB President Javier Ferrer

GDB President Javier Ferrer

The cash-strapped Retirement System has been under close scrutiny by stateside credit agencies who have warned about slashing Puerto Rico’s credit ratings to “junk” in the absence of action, something that would produce catastrophic consequences for the island’s economy.

It remains to be seen whether the reform approved will be enough to appease Standard & Poor’s, Moody’s and Fitch Ratings.

Basic points of the reform
The government’s decision to enact the reform sought “to strike a reasonable balance between the System’s fiscal crisis and the social and economic reality of our retirees and our public employees,” Ferrer said.

Among the changes are:

  1. Benefits accrued by all retirees are grandfathered by the reform;
  2. Minimum pension will be increased to $500 from $400;
  3. Benefits accrued up to June 30, 2013 by active public employees under the defined benefit plans of Law 447 of 1951 and of Law 1 of 1990 are grandfathered by the reform;
  4. Retirement age will be increased for some groups of employees;
  5. Employee contribution to the system will be increased to 10 percent from 8.275 percent;
  6. Active public employees will be granted future benefits based on a defined contribution plan (similar to the system 2000), which will be paid through a lifetime annuity (the “new hybrid plan”);
  7. Special laws’ benefits are modified (and the resulting savings will be allocated to the system); and
  8. Benefits payable to public employees under the system 2000 will be converted to a lifetime annuity.

The bill signed Thursday night was an amended version of the original measure introduced by the executive branch last month, said Treasury Secretary Melba Acosta.

  1. A staggered increase in the retirement age to 61 years for participants under Act 447, instead of 65 years as proposed in the original bill.
  2. Keeping the retirement age at 65 years for participants under Act 1 and a staggered increase in the retirement age to 65 years for participants under System 2000, instead of 67 years as proposed in the original bill.
  3. Establishing the retirement age of state and municipal police officers, firefighters, and custody officers at 55 years, instead of 58 as proposed in the original bill.
  4. Establishing the retirement age for new employees, joining the System after July 1, 2013, at age 67 and at age 58 for new state and municipal police officers, firefighters, and custody officers.
  5. Changing the benefits granted by Special Laws as follows: Keeping the medical plan contribution unaltered, up to a maximum $1,200; Keeping the medication bonus unaltered at $100; Reducing the Christmas bonus to $200 from $600; and Eliminating the summer bonus.
  6. Extending the period to retire from July 1, 2013, to December 31, 2013, for those employees who joined the System before April 1, 1990 and who may retire with 55 years of age or more, and 30 years of service or who may retire with 30 years of service or more, at any age. The maximum pension benefit for those who have reached at least 55 years of age will be 60 percent of their average salary, and for those who are less than 55 years old, the maximum pension will be 55 percent of their average salary.
  7. Establishing the rate to purchase services not credited at 9.5 percent, instead of 15 percent as established in a circular letter. The purchase of services not credited may be up to a maximum of 60 percent of the average salary for those who complete 30 years of service as of June 30, 2013.
  8. Veterans benefit: Veterans may purchase service for military leave rendered before June 30, 2013, at any time. Additionally, public employees in active military service may make voluntary contributions to their accounts under the New Hybrid Plan for periods in military service.

Acosta said the amendments were “the result of effective teamwork and ongoing communication between the legislative and executive branches, leading to a legislation that maintains the spirit and main objective of the original bill while addressing the concerns and suggestions submitted by pensioners, public employees and other sectors during the public hearings.”

Treasury Secretary Melba Acosta (Credit: © Mauricio Pascual)

Treasury Secretary Melba Acosta (Credit: © Mauricio Pascual)

The Commonwealth Retirement System is dragging a shortfall of about $36 billion, and without a significant reform, funds were expected to run out next year.

“We’ve said that the time has come to act responsibly and to stop kicking the can down the road because the present and future pensions of our public employees are at stake. The time has come because we came to understand that the crisis of the System is not merely a financial matter; it’s not just dollars and cents,” Ferrer said. “It’s about thousands of public employees who, absent any action, would be left without a pension after having served the government for a large part of their lives.”

Meanwhile, Acosta said the reform’s “impact and the sacrifice produced will be equally shared.”

“Everyone contributes. Retirees contribute through reduced special bonuses. Active public employees, through the change in benefit structure, changes in the retirement age for some groups of employees and the increase in employee contribution,” Acosta said.

“Finally, government employers and taxpayers in general contribute through the increase in employer contributions of Law 116, the allocation to the System of the savings produced by the changes in Special Laws’ benefits, and an additional annual legislative appropriation for the System during the next decades,” she said.

Author Details
Author Details
Business reporter with 30 years of experience writing for weekly and daily newspapers, as well as trade publications in Puerto Rico. My list of former employers includes Caribbean Business, The San Juan Star, and the Puerto Rico Daily Sun, among others. My areas of expertise include telecommunications, technology, retail, agriculture, tourism, banking and most other segments of Puerto Rico’s economy.

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