After insisting that his administration did not have a bill ready to submit to the legislature to reform the grossly unfunded public teacher’s retirement system, Governor Alejandro Garcia Padilla has announced he will call for the legislature to convene in an extraordinary session to consider a bill reforming the system. After initially announcing a press conference, Fortaleza instead sent out a press release after negotiations with teacher unions seemed at a standstill.

The bill, as of yet unreleased, will contain the following as indicated by Fortaleza:

  • Substituting the actual accumulated defined benefits plan for a plan of prospective definition contribution.
  • Increasing the minimum pension of retired teachers from $400 monthly to $500 monthly.
  • Establishing a minimum guaranteed pension of $1,562 monthly for teachers that have yet to retire, which increases by $1,162 the minimally guaranteed pension, and by $187 the actual monthly pension.
  • A guaranteed health insurance plan including medicines for teachers with family income below $25,000, starting in January 2015.
  • Pensions for merit, and the so called ‘Cadillac pensions’ will be eliminated, as requested by the teachers.
  • The retirement age will be set at 55 years, and the amount of years of service set at 30.
  • The teachers’ contribution towards their retirement plan will increase by 1%, and will not be revised until 2017.
  • The current special laws that benefit current retirees will be modified, guaranteeing a Christmas bonus of $200, a  $100 medicine bonus, and the contribution towards health insurance set at $1,200 a year.
  • Teachers will now be allowed to transfer their pensions to spouses and dependents.
  • Future teachers will be allowed to participate in the federal Social Security program.
  • This reform will not alter acquired benefits for teachers went it goes into effect. In other words, in those cases in which teachers already have a right to a pension that is 65% or 75% of their average salary, this reform will not modify those pensions, regardless of whether they retire or not.

The teachers’ retirement system has a $10.2 billion unfunded liability, which had to be addressed soon if the government hoped to avoid a downgrade to junk status of its bonds, a possibility that seems likely in the coming days.

After several days of negotiations, it seemed that Fortaleza grew tired of teachers’ demands, and decided to present a bill, one they either prepared in a day, or had prepared before lying to the media and teachers’ groups. In any case, teachers’ groups are already calling for manifestations at the Capitol starting November 19 at 11am.

Misleading figures

Despite their claims about increases, the numbers released in the statement paint a different picture from the reality. Multiple sources confirm for instance that for a teacher that has been working 30 years, the pension would amount to $2,025, a 33% percent reduction if the proposed minimum is what’s offered to teachers who worked all 30 years.

Garcia Padilla has been insistent about his desire to compromise, emphasizing that his proposal would give teachers a pension that is higher than the per capita income in Puerto Rico, which is $16,300. The proposed pension would be 15% above the per capita income in Puerto Rico, down from the 50% above the per capita income level that the current system offers.

If the terms released by Fortaleza hold, the 36,505 current retirees who receive pensions from the system should not be affected, except for the reductions and elimination of the bonus payments and health insurance plan contributions. What is not clear yet is whether the nearly 43,000 teachers who have yet to retire will be affected by the changes in how the pensions are calculated. From the wording in the press release from Fortaleza, it seems as if only those teachers who would current qualify for a pension that is 65% or 75% of their salary meaning those that already have 30 years of service would be left with the current system. All others can expect some changes, which depending on their particular situation, and planned retirement age, could hurt or benefit them.

If the reform goes through before the end of the year, we should know in the next 3 months whether it was enough to hold off another bond rating downgrade, with Moody’s being the first agency expected to announce a decision.