By Nick Brown
May 21 (Reuters) - Puerto Rico and its federally appointed oversight board reached a deal to avoid litigation over much-needed economic overhauls in the bankrupt U.S. territory, paring some protections for workers and putting off a dispute over the fate of pensioners.
Governor Ricardo Rossello and the island's legislature agreed to repeal protections that make it difficult for private-sector employers to fire workers at will, in hopes of spurring on-island hiring, Rossello said in a statement Sunday night. That repeal, which would bring Puerto Rico's labor laws in line with most states, is on track be introduced by the legislature next month.
In a separate statement early Monday morning, the board said it planned to revise accordingly the island's fiscal turnaround plan, which Rossello had strongly opposed. The changes will reduce the island's forecast six-year surplus to $6.05 billion from about $6.7 billion, the board said, due to new investments "to minimize implementation risks and push forward economic development."
Puerto Rico is battling the twin scourges of fiscal and natural disaster. The island was mired in the biggest insolvency in U.S. government history, with $120 billion of combined bond and pension debt, when it suffered its worst hurricane in nearly a century last September.
The board last month approved a blueprint for Puerto Rico's fiscal turnaround, whose financial projections were designed to form the basis of future debt restructuring talks with creditors.
But the governor vowed not to impose labor and pension reforms under the plan, signaling potential litigation.
Puerto Rico's benchmark GO debt due 2035, carrying an 8 percent coupon, showed no trades as of early Monday morning. It was last quoted at 42.75 cents on the dollar.
PENSIONS STILL UNCLEAR
The new deal brings sides together on labor reform, "considerably reducing implementation risks" and "avoiding costly litigation," the board said.
Rossello said the agreement "is not perfect, but it offers concrete results in benefits for our people, and allows us to enter the next phases with more certainty and less conflict."
A major sticking point remains public employee pensions, which are virtually insolvent, and underfunded by $50 billion. The board has previously proposed cutting benefits by an average of 10 percent, which Rossello opposes.
Neither side conceded its position in Monday's agreement. This means for the coming fiscal year, Rossello can maintain current benefits by paying them out of the island's general fund.
But the board is likely to push cuts through another avenue, namely by asking Puerto Rico's bankruptcy judge to approve them as part of a future debt restructuring plan in bankruptcy, board Executive Director Natalie Jaresko said.
"We expect to include [pension reform] in the plan of adjustment to be confirmed by the court," said Jaresko, reached for comment Monday morning. Under the new fiscal plan, she said, "reform is reflected in calculation of pension expenses in fiscal year 2020."