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Puerto Rico Teeters On Fiscal Edge Over Pensions

"It's a very complex situation," Garcia said at a recent news conference. "We will respect the pensions of those who contributed and built this country."

The island only recently emerged from a six-year recession and the unemployment rate is 14 percent, higher than any state. Manufacturing, the largest segment of the economy, has been in decline for years. Former Gov. Luis Fortuno laid off more than 20,000 government workers. His predecessor, Anibal Acevedo Vila, was forced to partially shut down the government for two weeks in May 2006 in a standoff over budget talks with the legislature.

In the meantime, the pension system's deficit kept growing.

"It's not that we're bad off. We're broke," said Miguel Morales, a consultant to a permanent committee charged with regulating the pension system. "The concern is that there will come a day when the government cannot respond and everyone will be left out on the street."

Nearly all of the problem centers on two pension systems â¿¿ one for teachers and one for other government workers â¿¿ that stopped accepting new beneficiaries in January 2000. They serve more than 273,000 active and retired government workers.

Those initially allowed workers to retire at age 55 with 25 years of service or at age 58 with 10 years of service. In 1990, legislators made significant changes, reducing benefits and increasing the retirement age from 55 to 65 years for newly hired workers.

As liabilities mounted, legislators scrapped that system 13 years ago, creating a new system that is more like a 401(k)-type plan in which workers must make their own contributions.

The newer defined-contribution plan is considered financially stable. But the older plan will have used up its assets "within several years," said Karen Krop, a senior director of public finance at Fitch Ratings.

If the system does collapse, the island's general fund is supposed to honor those collections. "But the general fund doesn't have that money," Velez said.

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