UPDATE 1-Puerto Rico governor, oversight board sued over planned pension cuts

(Adds detail from lawsuit and background on Puerto Rico pension and economic crises)

NEW YORK, April 12 (Reuters) – A Puerto Rico labor union sued Governor Ricardo Rossello and the U.S. territory’s financial oversight board on Wednesday, saying pension cuts being proposed as part of the island’s fiscal turnaround were unconstitutional.

The lawsuit, filed in federal court in San Juan by the Servidores Publicos Unidos (SPU), seeks a declaration the plan violates the federal Puerto Rico rescue law dubbed PROMESA, as well as an injunction blocking its implementation.

Puerto Rico’s current and future retirees would suffer “grievous harm” from the turnaround plan, the complaint said.

The legal action could further strain relations between bitterly divided constituencies involved in efforts to end Puerto Rico’s economic crisis, making a consensual restructuring deal harder to achieve.

The U.S. territory is trying to exit a crisis marked by $70 billion in debt, a 45 percent poverty rate, unemployment more than twice the U.S. average, and rampant emigration.

Its federally-appointed oversight board last month approved the turnaround plan that pushes draconian cuts to debt repayment and major austerity measures. The plan orders Rossello to cut pension spending by 10 percent a year – some $200 million – by 2020.

It was unclear Wednesday whether the government or the board planned to ask the court to freeze the lawsuit under PROMESA, which stays certain types of litigation over Puerto Rican debt until May 1.

Retirement spending is a contentious issue on an island where pension systems are already borderline insolvent thanks to decades of mismanagement by governments that routinely made overly generous promises to workers.

Rossello had said the cuts would be structured to protect the island’s poorest pensioners.

Further muddying waters, insolvency for the retirement systems would pit beneficiaries of Puerto Rico’s largest pension fund against the pension’s lenders, who hold liens on some of its assets.

Yennifer Alvarez, a spokeswoman for Rossello, said his legal counsel would evaluate the lawsuit. A spokesman for the oversight board had no immediate comment.

SPU represents more than 10,000 workers and another 2,300 retirees, according to the lawsuit.

Named plaintiffs include retired police officer Angel Ortiz Ramos, who receives about $2,500 a month to support himself and his wife.

Ortiz’s “fear of the pension cuts has led him to look for work,” the lawsuit said. “He has not been able to find employment.”

Police in Puerto Rico are not eligible for social security. (Reporting by Nick Brown; Editing by Chizu Nomiyama and Andrew Hay)

Article Courtesy of CNBC