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Puerto Rico’s fiscal reform plan looks to convince creditors

SAN JUAN/NEW YORK (Reuters) – Puerto Rico’s imminent fiscal reform plan will aim to persuade bondholders to restructure debt by showing the government is willing to share the burden.

But some of the plan’s expected reforms — such as cuts to teacher pensions and University of Puerto Rico subsidies — may be too politically unfeasible to coax bondholders to the table, according to analysts and experts on the island.

The U.S. commonwealth’s government is due to develop a debt adjustment plan by Aug. 30, engineered by a task force appointed by Governor Alejandro Garcia Padilla, who in June shocked investors by calling the island’s $72 billion debt load “unpayable.”

 A draft of the plan, leaked to local media this week, sees $1 billion in total spending cuts, though it may change before the final version.

 The draft included bitter medicine for the island’s teachers and other workers, which the government hopes will convince bondholders to agree to concessions as well.

 By signaling a willingness to impose tough measures, Padilla hopes close the credibility gap he faces with creditors who feel alienated by his “unpayable” remarks and frustrated by a two-year delay in annual financial reports.

 But committing to reforms may not restore credibility if the they are not seen as attainable, said Francisco Cimadevilla, a San Juan consultant and head of communications firm Forculus.

“There may be some low-hanging fruit that creditors will believe can be done quickly, but for much of the reforms, probably not,” Cimadevilla said in an interview. “So the question becomes, what is the net effect of the things that can get done? Is it enough to get creditors to the table?”

Along with overhauling teacher pensions and reducing UPR subsidies, the draft proposed scrapping year-end bonuses for workers, extending probationary periods and reducing vacation in both the public and private sectors.

For an administration elected with the support of labor, the measures are politically unappealing and some may require legislation. Puerto Rico’s government is prone to gridlock, with liberal and conservative sentiment existing within each of the two main parties.

Those effects may be heightened 14 months ahead of the island’s next gubernatorial election, in which the opposition party is expected to make a strong push for power and may not be inclined to continue the reforms.

“It is extremely difficult to usher legislation if you’re trying to … take away rights that are seen by people as being essential, and almost impossible to do it in a pre-election year,” said Marcos Rodriguez-Ema, former chief of staff to previous Puerto Rico Governor Luis Fortuno, and now a partner at private development group Puerto Rico Economic Development Co.

Puerto Rico’s teachers’ retirement system had a $10 billion unfunded liability and a 15.6 percent funded ratio as of June 30, 2013, according to its 2013 financial report. It had more than 80,000 members, about half currently receiving benefits, the report showed.

Last year, Padilla pushed legislation to reduce the size of pensions, raise retirement ages and move pensions into a 401(k)-like system, but a court struck down the measure.

Meanwhile, a government-commissioned report this year by former International Monetary Fund official Anne Krueger highlighted overstaffing in Puerto Rico’s education system and burdensome subsidies to the University of Puerto Rico.

Daniel Hanson, an analyst with Height Securities, said in a Thursday note that education reforms “are welcome and needed,” but “highlight the politically caustic nature of reform efforts in the territory.”

Hanson called the plan draft “soft,” saying it relies “on difficult managerial reforms” while implying that the government needs $2.5 billion per year in concessions from financial creditors.

Public outcry could also complicate reform efforts. Cuts to university subsidies could spark student protests which “would play very well into the hands of the opposition” party, said Argeo Quinones Perez, an economics professor at the University of Puerto Rico.

“It has a political cost for the governing party,” added Quinones Perez, who has been involved in protests at the school for decades.

Pensioners might also protest if faced with harsh cuts, though most believe demonstrations would remain peaceful.

“(We) are obviously against it and are going to do something” if faced with cuts, said Eva Ayala, president of teachers’ union Educamos, speaking through a translator. “(We) are going to get together with the parents and try to organize the people and fight against it.”

A spokeswoman for Sistema de Retiro Para Maestros, which administers teacher pensions, had no comment.

Historically, labor forces in Puerto Rico have protested cuts, including last year, when teachers went on strike against Padilla’s attempted pension reforms.

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